The good news is that Greece is out of the headlines. The bad news is it has been replaced by Italy, which as the world’s eighth-largest economy is both “too big to fail” and “too big to save.”

Europe’s financial crisis reached a turning point last week when exasperated German and French leaders finally conceded the possibility Greece could leave the Euro currency. They are now reportedly working on a scheme to kick out Italy and others as well, leaving a “core” monetary union. No one seems to know exactly how this would work or whether it would solve anything.

Turmoil across the sea was enough to derail short-term strength in U.S. stocks for the second time in as many weeks. A political crisis is brewing in Washington, too, as a congressional panel is deadlocked about new taxes and budget cuts. The “supercommittee,“ you may recall, was a compromise solution to the August debt-ceiling debate that caused S&P to cut the U.S. government’s previously-AAA credit rating.

The Treasury bond market survived, even thrived, in August and seems intent on doing so again this time around. The ten-year yield is once again below 2%. Capital flight from Europe is no doubt a big part of this move. Gold and oil marched higher.

China’s quick leap up in our Global relative strength rankings, discussed below, is partly related to domestic factors but may also have roots in Europe. We know European officials have been consulting closely with Beijing in recent weeks. Something bigger could be brewing. Not knowing what it could be, we think continued daily volatility may be the safest bet right now.

Sectors

Energy forced its way into the sector lead, jumping from the #4 spot a week ago, though it may not stay there long. Our energy sector benchmark failed twice in the last three weeks to break above its 200-day moving average into long-term uptrend territory. Second-place Technology is not far behind. Utilities, Industrials, Consumer Discretionary, and Materials are packed together in the middle of the chart. The strength in Utilities seems oddly incompatible with gains in economically-sensitive sectors, especially with Consumer Staples, Health Care, and Telecom all in the bottom half of the relative strength rankings. Financials climbed another rung up the ladder and is now two steps ahead of last-place Telecom.

Styles

Once again we see very little dispersion across Style categories. The narrow range means relative positions could change quickly. Today’s top and bottom categories, Small Cap Growth and Micro Cap, are more often seen travelling together. The shift away from capitalization order seems to be continuing as Small Caps own the top two spots and Mega Cap stays near the bottom. Growth is still preferred over Value for now.

Global

China climbed from last place to first in just two weeks – possibly the fastest swing ever. A closer look is less encouraging. The recent rally was indeed exceptionally strong, but it still only brought China ETFs back up to their late-August trading range – which in turn was well below where they stood at the beginning of August. So what we see boils down to a reversal of the September breakdown. The United Kingdom, whose own currency allows it to watch the Euro turmoil in relative safety, is right behind China. The U.S. and Latin America are next in line. Canada and Emerging Markets now show positive momentum. Relative weakness in Canada remains puzzling in the face of a strong energy sector. Currency weakness is certainly a factor but doesn’t account for all of the discrepancy. Europe and Japan are still lowest on the list. Japan’s October 31 currency intervention has not helped the nation’s exporters yet, so Japanese shares may get worse before they get better.