It's Monday, so that means we get to play make-believe.

The market was having a pretty good week last week.  After the same rumor (basically that the EU is planning a "Euro-TARP") caused a 4.7% rally on "turnaround Tuesday" the market gave signals that we may have hit bottom (for a while anyway).  Some better than expected economic data certainly helped as many people had been selling stocks expecting the U.S. to go into another recession.

Is the US headed towards recession?  Check out SEM's answer here.

Remember, the news out of Europe that is moving the market is the same thing that has been moving it off and on since July -- that this time they really are going to get serious about their financial crisis and will come up with a plan that will really fix things once and for all. 

The sell-off on Friday came after Angel Merkel, Greece's chancellor, had basically said that a "Euro bond" was a non-starter in Germany.  The reason it would be a non-started is because each EU country would then be on the hook for any of the bad debts of the other countries, thus lowering the credit worthiness of Germany.  Further accelerating the late day sell-off was Fitch's downgrade of Italy & Spain's debt, reminding us all that unless they hurry up and start getting money to all the countries that are bankrupt, there will be no way to stem the widespread contagion that could develop.

Apparently, Ms. Merkel either had a change of heart or continues to speak out of both sides of her mouth like all good politicians facing reelection seem to do.  Over the weekend she and French President Nicolas Sarkozy pledged that they will have a concrete plan in place by the end of this month. 

Following in the footsteps of U.S. Treasury Secretary Tim Geithner, UK prime minister David Cameron joined the "I know we have our own financial mess in our country, but here is some advice for your financial mess" club.  He is basically endorsing the "big bazooka" plan that is rumored to be in the works and has encouraged France and Germany to put their own credit worthiness on the line by backing the plan.

The market is also dealing with the tiny issue that Slovakia has not yet approved the July expansion of the European Financial Stability Facility (EFSF).  That is leading everyone to brush up on their Slovakian Constitution understanding.  I won't pretend to be an expert.  Some articles say that they will be able to approved the expansion, while others say that it is unconstitutional anyway.  If they do not approve it, then the "bazooka" will not be able to happen because the plan involves leveraging the EFSF in order to recapitalize the failing banks.

Finally, the market this morning seems pleased that Dexia, Belgium's largest bank has been saved by the French and Belgium government.  The fact that Dexia had passed the EU's "stress tests" earlier this summer is not a concern on make believe Monday.

When we return from the land of make believe, here is a diagram that should make everyone worry.  It was produced by Goldman Sachs and illustrates the possible outcome for each country in the EU. 

"Does a country do sufficient fiscal and structural reform & bank recaps to generate growth and get back onto the good equilibrium?"

You certainly have to be living in the land of make believe to believe that will ever happen with many of the EU countries given what we are seeing thus far.

As for the market, it is just past the halfway point of the trading range it has developed since it broke down in July.  In order to get to the top of the range it will be fighting the downtrend line along with the 50 day moving average around 1178 very soon. 

The comments and posts published in the SEM Trader's Blog ARE NOT investment recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.

Investing in the stock or bond markets involves risk and may not be suitable for all investors.  Before making any investment decisions you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with your investments and seek advice from an independent financial advisor if you have any doubts.  All investments involve risk including those managed by Strategic Equity Management.

Opinions expressed at www.stratequity.com are those of the individual authors and do not necessarily represent the opinion of Strategic Equity Management or its management.  Any opinions, news, research, analysis, prices or other information contained on this website, by Strategic Equity Management, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. Strategic Equity Management will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

The use of this website constitutes acceptance of our user agreement.  Past performance is NOT indicative of future results.