The implosion of MF Global and a raft of skepticism about the European Union bailout deal show that Wall Street's worries over government debt may have only just begun.
Despite a sharp 3 percent rally Thursday following the agreement to rescue Greece and other debt-plagued nations, misgivings crept back into the market that perhaps the problem isn't fixed after all.
Stocks traded sideways Friday, then plunged Mondayas investors digested the bailout ramifications.
The bankruptcy protection filing from MF Global— a mid-sized trading firm run by former New Jersey Gov. and Goldman Sachs CEO Jon Corzine — only helped amplify the realization that more difficulties remain. MF Global got into trouble mainly because Corzine made tragically wrong bets on European sovereigns that unraveled when it became clear that bondholders of Greek debt will not be made whole as the nation tries to make its way out of its fiscal morass.
"The euphoria about the latest euro zone bailout will fade quickly, as investors realize that the underlying solvency issues have not been addressed," Charles Biderman, CEO at TrimTabs market research firm, wrote in his weekly analysis that came out before the MF Global bankruptcy filing Monday morning.
"Trying to solve the sovereign debt crisis with more debt and more leverage will not work," he added. "Instead, it will make the problem worse and make the inevitable bust bigger."
The EU solution to the debt probleminvolved a 50 percent haircut on Greek bonds, an increase to 9 percent of bank Tier 1 capital ratio, and an amping up of the European Financial Stability Fund to $1.4 trillion.
While the move at least temporarily allows the euro zone to continue without a major debt catastrophe, sentiment began to build that the feeling won't last long.
"The current set of developed markets policymakers will be exposed as emperors with no clothes on," Bob Janjuah, the co-head of cross-asset allocation strategy at Nomura Securities International in London, wrote in a note to clients. "This latest round of euro zone shock and awe is, in my view, nothing more than a confidence trick and has possibly even set up an even worse financial outcome."
Janjuah forecasts a slate of dour potential consequencesfor the market — among them the Standard & Poor's 500 tumbling to 800 or 900, and possibly as low as 700, and a Dow Jones Industrial Average that could trade at par with the price of gold.
Traditionally bearish, Janjuah said his forecast is coming into play even quicker than he anticipated, evidenced by the near record-setting October U.S. stock rally, which he expected would come later in the fourth quarter and be followed by a sharp plunge.
"I strongly believe that we have begun, or (are) about to begin, the next major risk-off phase, which should culminate in my secular targets being hit in 2012," he wrote. "The sharpness of the rally from the October risk lows suggests strongly to me that what I thought would be a process that plays out over a year may well now be a process where the timeframe has been acclerated by a quarter, maybe two quarters."
Janjuah's analysis doesn't square completely with the technical history of the market.
The sharp price decline from May 2 to Oct. 4 resulted in an intraday bear market drop of 21.6 percent, which Sam Stovall, S&P's chief equity strategist, termed a "baby bear" which is usually followed by a market rise.
So-called baby bears take a median of two months to get back to their previous levels, Stovall found. In the previous four cases since 1945 — a limited sample, to be sure — the average gain in the next three months is 13.5 percent.
"Lingering concerns surrounding global fundamental and political issues give investors reasons to remain cautious, yet recent equity price performances indicate that the worst may actually be over," Stovall wrote in an analysis.
The conflicting trends, then, could be setting up for "extreme volatility," said Mary Ann Bartels, technical research analyst at Bank of America Merrill Lynch.
Bartels expects the S&P 500 to gain another 100 points or so — as long as it can stay above its 200-day moving average.
"A risk-on trade is on, but measures of bank lending stress remain elevated in Europe and have been rising in the U.S.," Bartels said in a research note. "In addition, sentiment is beginning to correct from contrarian bullish or oversold levels and can move quickly. This rally appears tactical in nature."
The market's fate likely will be tied closely to how willingly investors will buy into the European debt solution, as well as what the bipartisan "super committee" in Washington can accomplish relative to the U.S. debt problem.
As for the MF Global situation, the immediate take is that the firm's collapse is unlikely to lead to mass market contagion along the lines of Lehman Brothers, which failed in September 2009 and dragged down the rest of the financial system with it.
Dick Bove, vice president of equity research at Rochdale Securities, released an analysis Monday positing that American banks even could gain from the European situation, believing that the exposure here is contained.
"For American bank investors, the key point is that this problem is now a European problem not an American bank issue," Bove told clients. "U.S. bank stocks are likely to continue to benefit as a result."
Yet Bove cited two banks in particular that should do well on "alleviation of fears" regarding the euro zone crisis. They are Bank of America and Morgan Stanley , both of which were getting crushed and were among the worst-performing banks in Monday trading.
Nomura's Janjuah expects more damage to come.
"This latest bailout relies on the market not calling what I see is a huge bluff," he said. "If the market does call it, the bailout simply won't be credible or even deliverable. It is instead akin to a self-referencing Ponzi scheme, and I can't believe euro zone policymakers have even considered going down this route."