The US equity market remains headline-driven, but the market moving news flow isn't economic data or earnings. Events on the other side of the Atlantic have become the primary drivers for volatility in the US stock market. Today, for example, weakness across the Eurozone and the euro is weighing on Wall Street, despite better-than-expected domestic economic news. The Dow Jones Industrial Average (.DJI)  is under water. Indeed, the events in Europe are having a big impact on the US equity market and creating a volatile environment heading into a historically turbulent month for the US equity market.

The domestic economic news has seen some improvement over the past two days. Friday, data showed the Chicago PMI, a gauge of regional manufacturing activity, up to 60.4 in September, from 56.5 in August, and much better than the 54.0 that was expected. At the same time, the University of Michigan Consumer Sentiment index improved to 59.4, from 57.8 in mid-September and better than the 57.5 that was expected. Data released Monday also surprised to the upside. The ISM Index of manufacturing activity rose to 51.6 in September, from 50.5 in August and ahead of the 50.6 that economists had predicted. Meanwhile, Construction Spending was up 1.4% in August. The rocket scientists were looking for a decline of 0.5%!

The strong data failed to lift the US equity market. Instead, the Dow Jones Industrial Average is down 194 points midday Monday and has given up 434 points over the past two sessions! The primary concern is the negative impact from the European debt crisis. Investors fear that debt defaults would hurt banks, roil equity markets, and drive the Eurozone into a deeper recession - or worse. Europe is an important trading partner to the US and the banking systems are closely tied.

Equity markets are already reeling across the Eurozone. One month ago, before the Labor Day holiday, I noted (in Seven Trends to Watch Tuesday) that the action in the iShares Germany Fund (EWG) will be worth watching. Shares hit a 52-week low of $19.53 on August 19 and we wanted see those 52-week lows hold after the three-day weekend. If not, "expect the volatility across the Atlantic to spill over onto US shores next week."

EWG failed to hold the support lows around $19.50 in early-September. Trading has been volatile in the weeks that followed. Shares are down 10.6% over the past month. Now, we can see from the chart (below), the previous support area has become a source of resistance. Keep in mind, EWG is a US-listed product composed of shares of German companies. Yet, the chart shows a textbook example of an old rule of technical analysis - previous support areas often form resistance and vice versa. Now, the chart pattern is possibly developing into a reversal - triple bottom or upside head-and-shoulders. However, until shares can break above the previous resistance around $19.50, it's obviously too early to call a bottom in Germany's equity market.



Obviously, the action in the euro will impact the US equity market and volatility as well. The euro is falling to 10-year lows against the yen and 8-month lows on the dollar today. The euro dipped below 1.33 against the buck and is now making a run to 1.32 - its lowest level since early January. Consequently, CurrencyShares Euro Trust ( FXE), which was probing support around $140 one month ago, is down to $132. Shares, which track the EUR/USD currency pair (X100), are down 7.8% since August.



Rightly or wrongly, the action across the Eurozone is driving the high levels of market volatility heading into a historically volatile month of October. Bumbling EU officials can't seem to reach agreement on plans to solve the debt crisis. Equity markets and the euro are reeling. It's a headline-driven market and the news flow from Europe is still the primary driver. Consequently, CBOE Volatility Index ( VIX) is up 1.21 to 44.17 today and once again in striking distance (8.7%) of the 15-month high of 48 set on August 8. That trend seems likely to persist in the days ahead, but keep an eye on the charts - as the month of October has also been a very important historical turning point for the US equity market - including at the end of the Global Financial Crisis in 1998 and the tech bubble in 2002.

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At the time of publication, Fred Ruffy held no positions in the stocks or issues mentioned.