Despite US stock market indexes making the best weekly gains in a month, the failure of good news on the eurozone front is bad news. It creates investor anxiety and tends to lead the market to the downside. It also leaves the market to the pros who buy and sell all the time, and that’s the only good omen I can offer you; the amateurs might be out of the market or refusing to buy more, but the traders have not run for the doors yet like they did last year.

However, we can’t rule a repeat of last year out because the next couple of months are bound to be really challenging. We will be in the hands of the European Central Bank (ECB) and the eurozone leaders who will have to either save Greece and the euro or else ring-fence the Greeks while preparing to back Italy and Spain.

When in … Milan

I’m writing this from Milan and I can tell you economic activity is happening here with cranes on the skyline. The ECB has to look at the banks of these two countries the way the US Federal Reserve’s Ben Bernanke looked at the US banks – the big ones can’t fail.

I expect, even though it doesn’t appear this way, Europe’s key economic officials to be looking at worst case scenarios, just as I hope the majority of Greeks will be before the 17 June election. I also hope the austerity intensity will be dialed back to ensure debt repayment happens, albeit at a slower rate, while the encouragement of economic growth is pursued in countries such as Greece.

The Yanks will be on a public holiday Monday and so our markets will watch the European stock price movements.

I reckon the S&P 500 index tells the story of this year; it was down 0.22% on Friday at 1,317.82, but up 1.74% for the week; down 5.73% for the month (as I warned, you can’t trust May), but up 4.79% for the calendar year.

So what are the big issues to note to determine how you want to play the next few months? My crystal ball still backs a positive end to the year, based on my belief resolutions will emerge over the next three to four months and today’s doubts driven by no-real-solution news of what is happening in Europe can only confound the market – that’s why we’re down for the month.

Here’s what I’m watching:

• The VIX or fear index is at 21.81, which is good considering all the scary news around!

• The US market is trying to decouple from Europe, with all ten sectors in the S&P 500 index up for the week, but the test will come on 17 June when the Greeks vote.

• Spanish banks are a worry with Bankia in need of a $19 billion rescue package and this was double what the Government was ready for!

• Money is leaving European banks. This has to be stopped and this will be a big job for EU officials and the ECB.

• The US economic recovery is mixed but it is still a genuine good news story with the Thomson Reuters/University of Michigan’s consumer sentiment reading coming in at a higher than expected 79.3. This was the best reading since October 2007 and that’s before the GFC market crash started!

• If Friday’s US jobs report is a bad one, it won’t help US market confidence, but a good one could have the opposite effect.

• The China slowdown story and the India slowdown as well. As big call merchant, Marc Faber, of the Boom, Gloom & Doom newsletter, who CAN get it right at times, is tipping another global recession and the next few months will determine the validity of his call, which is at odds with the International Monetary Fund (IMF), the World Bank and Organisation for Economic Co-operation and Development (OECD) (Gee, I wish these guys had a good forecasting track record.)

• What Germany does on austerity and eurobonds, which could be used to fund the weak governments more cheaply as they would be linked more closely to stronger eurozone governments/economies.

This week the Yanks get a lot of economic data and we have to see improving economic data around the world along with policies that contain debt contagion, which could put a run on European banks.

Two big takeaways from last week were the Greek stock market, which fell by 11.8% – a 22-year low – and by 30% this month! The Greeks can’t ignore what their crazy voting has done and leaving the euro will create an even greater economic calamity.

One final thing: even with the bank problems in Spain, the banks were down 0.4% on the Spanish stock market and the Italian overall market was up 0.8%. This is either a case of market players being geniuses or nincompoops. I hope this is a sign of hope, but as I have always argued, hope is not a strategy.

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