Europe Triggers Another Bipolar Day (SPY, EWI, EWG, DIA)

After a gut-wrenching week, major U.S. indexes took off today with the Dow Jones Industrial Average (NYSEARCA) advancing 2.6%, the NASDAQ (NYSEARCA) jumping 3.5% and the S&P 500 (NYSEARCA) adding 2.9%.

The catalyst for today’s euphoria was the same as last week’s bout of depression, as news, rumors and denials all flowed from Europe.

The rally was initially supposedly triggered by news that Europe was moving towards a more perfect union and that the IMF was readying a bailout for Italy, (NYSEARCA) but that rumor was denied and European leaders led by Chancellor Merkel of Germany (NYSEARCA)are discussing treaty changes that could be years in the making.

We have seen these ”rumor rallies” before and they tend to die suddenly when the rumor is denied, but hopes still ran high that some substantive answers might come from the European summit meeting that begins in Brussels Tuesday evening.  As a result, today’s action was broadly positive with Germany’s index (NYSEARCA:EWG) vaulting 5.7% and Italy taking a healthy 6% jump.

Unlike the equities markets, credit markets were more subdued with yields on Italian 10 year bonds still above the “unsustainable” 7% threshold and Moody’s announcement that they’ll be reviewing more than 80 European banks in 15 countries with the likely outcome of potential downgrades when the review is complete.

In other downgrade news closer to home, Fitch maintained the AAA credit rating of the United States but changed its outlook to negative which implies a 50% chance of an overall downgrade within the next two years.

New home sales for October rose 1.3% to 307,000, missing the 320,000 forecast, but slightly better than last month’s 303,000.  However, even this improvement was anemic, at best, as 700,000 new sales is the level normally seen in “healthy” markets which makes today’s market far less than healthy by conventional standards.

Tomorrow brings the Case-Shiller housing report and consumer confidence and, one can be sure, more mood swings from Europe. Bottom line is that today’s rally changed nothing on a technical basis.  Fundamentals remain precarious with Europe hurtling between emotional extremes on a day to day basis.  Perhaps the only certainty might be that the “endgame” for Europe is near, but not even that is certain in these historic days.

Disclaimer:  Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.