We ended last week’s update highlighting the overbought condition in the market, as measured by the S&P 500, and a warning that a consolidation was very likely. This week, we got that consolidation at the hands of the never-ending European debt debacle. Financials really got clobbered, down by more than five percent. The best performing sector was utilities which were almost flat for the week. Some industries that really stood out last week were: specialty eateries (Starbucks and Panera Bread) on the upside and electronics (Sony and Panasonic) and financials (Citibank and Royal Bank of Canada) on the downside.

For the year, the S&P500 is virtually flat, the Nasdaq 100 is up 6% and the best performing asset is gold, up 23.5%. Although critics of technical analysis contend that for every support level that holds, many more are broken, even critics of technical analysis should be aware of notable levels. In this case, the S&P 500 should see short term support in any pullback at the 1,215 to 1,220 level, while 1,275—1,285 is likely to act a short-term ceiling.

The debt crisis in Europe took center stage this week as policy makers sought to settle outstanding issues ahead of the G-20 meeting in Cannes. But while Greece still gets all the headlines, recent developments in Italy are a much bigger concern. In terms of the major US banks, Bank of America (BAC) and Morgan Stanley (MS) continue to have the highest default risk, while Wells Fargo (WFC) and JP Morgan (JPM) have the lowest. The debt crisis claimed its largest victim this week with the bankruptcy of MF Global, where details of that company’s bankruptcy continue to unfold. Along with MF Global, another firm that got caught up in rumors regarding its exposure to Europe as well as MF Global, was Jefferies (JEF). The investment bank, which is considered to be among the leading second tier firms, saw its stock crater on Thursday when Egan Jones cut its credit rating on the firm. The stock ended up triggering circuit breakers twice before noon, and then rebounded after the CEO and several analysts refuted the claims of the credit downgrade.

The sharp two-day decline that kicked off this week was enough to send some bulls heading back to the bear cave.  After rising to its best levels since early April, individual investor sentiment declined from 43% down to 40.2% according to the American Association of Individual Investors (AAII).  Given that equities were trading at what were by some measures historically overbought levels, it is understandable that investors had an itchy trigger finger. The US dollar gained against all other currencies as nervousness about Europe gripped traders. Oil is nearing $95/barrel.

Unfortunately for investors, there is no escaping the ever evolving circumstances in Europe. With each new twist and turn in that story, our market will gyrate, but since there is no way to predict really how events will unfold, we unfortunately just have to react as they occur, and keep in mind that market reactions, both to the upside and downside, will likely be exaggerated, so it is important for investors to keep their emotions in check. This market has 30-year industry veterans very much confused. Earnings continue to impress, but perhaps the most ironic aspect of the earnings results we have seen this quarter is that despite the fact that just a month ago fears of a double dip were at the forefront, earnings are on pace to hit a record high this quarter.

Finally, the much-anticipated IPO from Groupon was priced this week. This deal was clearly engineered to pop on the open by floating only 5% of the shares. They may eventually surprise us but the most recent trends aren’t encouraging. Here’s my earlier take on the deal.

Have a pleasant and productive week.

	CURRENT	1 MO PRIOR	3 MO PRIOR	6 MO PRIOR	1 YR PRIOR
Fed Funds Rate	0.07	0.08	0.07	0.10	0.20
Fed Reserve Target Rate	0.25	0.25	0.25	0.25	0.25
Prime Rate	3.25	3.25	3.25	3.25	3.25
US Unemployment Rate	9.00	9.10	9.10	9.00	9.70
1-Month Libor	0.25	0.24	0.21	0.21	0.25
3-Month Libor	0.44	0.38	0.27	0.27	0.29

	CURRENT	1 MO PRIOR	3 MO PRIOR	6 MO PRIOR	1 YR PRIOR
30-Year Fixed	4.09	4.00	4.31	4.65	4.21
15-Year Fixed	3.38	3.37	3.48	3.88	3.60
5/1-Year ARM	3.01	2.99	2.86	3.19	3.28
1-Year ARM	2.94	2.95	2.96	2.93	3.07
30-Year Fixed Jumbo	4.72	4.75	4.94	5.25	5.11
15-Year Fixed Jumbo	4.04	4.13	4.30	4.51	4.50
5/1-Year ARM Jumbo	3.13	3.17	3.35	3.53	3.80