I stated in my commentary last weekend that Friday's rally was overblown and I still believe it. But to quote John Maynard Keynes, "The market can remain irrational longer than you can remain solvent!"
Here's some random thoughts:
The ECB is announcing their interest rate decision tomorrow. Most are expecting a 25 basis point cut in their key lending rate. A few are expecting a deeper cut (50 basis points) and I've read of only one pundit who's expecting they are going to hold steady until August with no change. I'm in the 25 basis point camp and believe this rate cut is already discounted by the market. If Draghi cuts rates more than this the market will resume a strong uptrend. If there is no cut this market will topple over. If Draghi announces any other easing measures (LTRO, etc.) this will also pump the market higher.
I'm ambivalent on the weekly jobless claims coming out at 8:30 AM EST and also on Friday's monthly employment report. The weekly series is volatile and tomorrow's report may be overshadowed by Friday's bigger report. All I can say here is that we've had some disappointing reports over the past few months and just on that basis odds favor better than expected reports. However, the global economy is clearly slowing and the word around the street that it somehow is not going to effect us is nonsense. The ISM report already disproves that thesis and we're already seeing earnings reports from multi nationals like Nike that have been negatively impacted by the deepening recession/depression in Europe.
There's been much commentary regarding how Angela Merkel caved into Monte, Rajoy and Hollande last week but when you really dig into what came out of the EU Summit very little has changed. Yes, banks can now directly access money from the EFSF/ESM but Germany (and other EU states) still have to vote on whether to release the funds. Already the Finns and the Dutch have already publicly announced they will not allow this kind of lending. And secondly, conditionality will still apply. There will be no free lunch for periphery banks or their sovereigns.
The only thing that came out of the summit that was ground breaking was the effort to appoint a central banking authority but the lack of detail surrounding this announcement almost guarantees that the appointment of an entity (possibly the ECB) to head up this authority by the year end deadline will not be met. And banks can't directly access the EFSF/ESM money until this authority is in place!
So, in retrospect, why did the market rally? Because expectations were so low going into the summit that the least indication that there was fractional cooperation between the parties at the summit was enough to ignite this rally.