Updated from 10/01/11 with news that Greece will miss deficit targets

NEW YORK ( TheStreet) -- A rocky third quarter is finally in the books , but don't exhale yet. This storm is far from over.

"Crises that plagued the markets throughout September have historically reached a crescendo in October, and this year is no exception," says Randy Warren, chief investment officer at Warren Financial Service. "We're shoring up protection for our portfolios and preparing for the worst."

Investment strategists have been vociferous in their warnings about stock picking: Defensive names and those with hefty dividends might be OK. But as for the banks or multinationals with exposure to Europe, steer clear!

All three major equity indices are coming off their worst quarterly performances since the financial crisis kicked in in late 2008, with Friday's ugliness a fitting capper. Next week, quarter-end portfolio rebalancing won't be there to buoy stocks. If corporate earnings, which will start picking up two weeks from now, don't give this market a boost, nothing will.

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A miracle out of Europe would do the trick, of course, but there's no predicting when or if that will happen.

And this past week the market managed to trap long and short investors alike, even though one could argue there were improvements in Europe.

A proposal to expand the eurozone rescue fund garnered some more approval (with the most important green light coming from Germany), Greece passed some more austerity measures, and officials continued to debate a bigger plan to lever up the rescue fund.

Naturally, the longer the talks across the pond drag on, the longer the volatility beast reigns .

European Roadblocks

As with last week, investors will be at the mercy of any incremental developments from the eurozone.

On Sunday, Greece announced that it would miss deficit targets for 2011 and 2012 that are a requirement of the country's bailout.

The country's finance ministry said it missed the 2011 target because the economy is contracting more than expected.

Meanwhile, Greece's cabinet said it will place up to 28,000 public employees on reserve, which means they will be suspended with reduced pay.

On Monday, eurozone finance ministers will hold a two-day meeting on expanding the rescue fund, the European Financial Stability Facility. Investors get spooked whenever an official says something negative and giddy when the comments sound upbeat. So far, the market doesn't seem tired of this game.

Next week, the chatter could center on how much debt Greece will be able to write off. Already, speculation has swirled that Greece could take as much as a 75% haircut instead of the original 21%. Some 60% of investors now believe that a hard but orderly Greek restructuring would be positive for risky assets, according to a recent survey by Barclays.

Investors are also still waiting for a decision on whether Greece will get its next round of bailout funding. They could be left waiting until Oct. 13, which is essentially the last possible minute officials can stall until the country would default (Debt ceiling lockdown, anyone? Yes, but the Greek version will be far worse). On Oct. 14, two billion euros worth of Greek Treasury bills mature.

This weekend Greece still has to cut salaries of its government workers by 20%, another one of the demands by the "troika" of creditors before the country can get its next round of bailout money. Protestors might take to the streets of Athens, again.

Meanwhile, officials continue to debate the possibility of levering up the bailout fund so that the facility would be large enough to support the debt of Greece, Portugal, Ireland, Spain and Italy. Economists aren't expecting conclusions anytime soon, but now that the idea is out of the bag, it's likely the markets will only punish policymakers further if the proposal falls flat on its face.

On Thursday, the European Central Bank is expected to announce its decision on the key interest rate level and other monetary policy changes. Investors have speculated the central bank could cut the rate after raising it twice this year, although a jump in eurozone inflation in September has cooled some of these hopes.

Since the ECB is making an appearance, there's a risk officials could throw cold water on the idea of financing an expanded rescue fund. Remember, the ECB is the only player in all this mess with an unlimited balance sheet.

Also next week, research firm Capital Economics expects that eurozone retail spending remained weak and that a slowdown in Germany's industrial production intensified.

Adding to the Complexity

For months, pessimism has centered around Europe and the U.S. Now China is being added to the mix. Economists were counting on emerging economies to provide upside, but worries about slowing growth in Asia have been increasing lately.

Concerns about a housing bubble, slowing investment and manufacturing in China, as well as concerns about local government debt are putting pressure on Chinese stocks, suggesting that the country's once-booming economy might be more at risk for a hard landing.

Export-related stocks have been hit especially hard by the global rout, along with the property and manufacturing sectors. Copper, for which China is the world's largest consumer, has tumbled 25% in September alone. The Shanghai Composite Index lost 15% in the third quarter. If economic data out of China rattle investors more, then we could see Wall Street start following Asian markets lower, not the other way around.

A small piece of good news: The Shanghai stock exchange is closed all next week in celebration of China's National Day on Oct. 1.

Don't Forget Problems at Home

There are two camps of investors emerging -- one camp says the slowdown in the global economy is worsening and will soon bleed into once-healthy corporate profits; the other sees October as a sweet opportunity to take advantage of some undervalued stocks. The latter camp argues that corporate America is ahead of the macroeconomic gloom, that U.S. companies have been cutting costs and workers since the recession and thus will have good third-quarter numbers to report.

On Friday, Warren Buffet appeared on CNBC saying that a U.S. economic recession is "very, very unlikely." The famed investor gave a tiny boost to the Dow, which of course didn't last.

Unfortunately for next week, we're in a lull before third-quarter earnings season kicks into high gear. The handful of reports that are worth watching include Yum! Brands ( YUM), Costco ( COST), Constellation Brands ( STZ), Monsanto ( MON) and Marriott International ( MAR).

Since economic data has been a mixed bag, it will likely be a long time before the economists come to a consensus on whether the economy is in a recession. Investors aren't putting much stock in single data points right now anyway.

"If there's a positive number, people say that's great. But can we put a string of those together?" says Jim Maguire, a floor trader with NativeOne Institutional Trading.

The biggest economic indicator slated for next week is Friday's jobs report for September. The unemployment rate is expected to remain close to 9% for at least the next couple of months by most estimates. Economists expect the end of the Verizon ( VZ) labor strike to provide a small boost to the number of private sector jobs.

Capital Economics, however, estimates the economy probably created no new jobs in total for the second straight month. Amid low levels of business optimism, few have high hopes for a nice surprise by the week's end. Even if the headline payrolls number comes in better than expectations, eurozone worries will probably smother any small upside.

If equities tumble more, yields on bonds incredibly may have even further to fall. Already the spread between the 10-year and 30-year yields has reached to its lowest level in more than a year. The Federal Reserve plans to kick off "Operation Twist" on Monday with the purchase of $2.25 billion to $2.75 billion in 30-year Treasuries, which could push up demand for long-term debt even further.

There's a myriad of moving parts that investors need to keep their eyes on next week. Greece's situation is coming to a head, and Italy's clock is bound to start ticking as well. "You have to be prepared to take your daily European beating even if you don't deserve it," said Jim Cramer on Friday's 'Mad Money .'

"You have to accept the linkage," he said. "It's just too powerful."

-- Written by Chao Deng in New York.

>To contact the writer of this article, click here: Chao Deng.

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