Market Still Feeling Heavy as 4th Quarter Begins

US stock futures point to a slightly lower open this morning after more posturing out of Europe this weekend with nothing solved. There are a lot of events taking place over the next few weeks, but we’ll will get into that later. Today is the first day of the 4th quarter and it will be interesting to see if some of the new allocated funds gets put to work the first few days. Can these new funds protect the 1118-1122 area in the S&P, and then the 1101 August low.

October is often a month that sees the stock market put in a bottom, will that trend continue? The Street is already starting off on the back foot this morning after news that Greece will miss its deficit target for the year. Stocks are coming off their worst quarter since the financial crisis of 2008, with the Dow dropping 12%.

While all of the focus has been on European and American economies, the forgotten continent has been Asia and what effect the struggling world economy would have on China’s growth. Fears are growing about cracks in the Chinese economy, and Asian markets are deep in the red today to start the fourth quarter.

Last week leading stocks started to get technically weaker, so active traders were stopped out of most swing long positions. The most telling day was Tuesday, when the Dow was up 225+ and stocks like Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX), Baidu.com (BIDU), Sina (SINA) Priceline.com (PCLN) Green Mountain Coffee (GMCR), Wynn (WYNN) and Las Vegas Sands (LVS) were all red! When the market loses its leaders, the rest are generally soon to follow.

With the start of a new quarter but a heavy market, this should be an interesting week. The action over the past few weeks tells you that the market is going significantly lower, but the wild card remains policy action from Europe and the US Fed that could trigger a massive short covering rally. Technically, to relieve some pressure the S&P must take back the 1140-1145 area soon. On the flip side, a daily close below the 1101 level would likely lead to more downside.

Here are some important events to watch out for this week.

Major catalysts to watch coming up

• Eurozone finance ministers meeting – Oct. 3-4 – the main talking point will be the the EFSF. How can it be enhanced, both in terms of size and efficiency. Look for Germany to continue to be the most reluctant participant in any new measures. Expectations aren’t very high for anything material to come out of this meeting, and the public comunique could be a non-event.

• ISM Survey – Monday, Oct. 3 10am ET- Recall the last US survey (August)? It surprised to the upside so the bar is a bit higher.

• Non-farm payrolls and unemployment rate – Friday, Oct. 7 8:30am ET– The Street is modeling 50% NFP adds (w/90K privates). This is the most important economic data at this point, with Fed Chairman Ben Bernanke calling the unemployment situation a national crisis.

• Bernanke testifying before Congress – Tuesday, Oct 4 – Investors want to know what’s next after Operation Twist, and this will be his first chance to address that program. Based on the post-Twist sell-off, the market believes Fed to have become more hawkish (with 3 dissenters on the FOMC). This has helped to strengthen the dollar, which weighs on equities. However, with inflation expectations falling, the chairman may decide to highlight the tools still left in the Fed’s arsenal.

• Operation Twist will actually commence later this week. The WSJ on Friday said “Twist” may actually wind up surprising on the upside in terms of its influence on Treasury yields

By John Darsie

*Disclosures: Scott Redler is long October 111-112 puts and Short SPY

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