Yesterday, stocks pulled back ahead of Italy's 10-year bond auction. Investors were concerned that the demand would be low. This morning we learned that the bid to cover was 1.2 and yields were over 7%. The dismal results were largely priced into the market and stocks opened a bit higher. As I've been mentioning, European banks will have little appetite for longer-term maturities. They fell into this trap three years ago when they borrowed money from the ECB and now they are sitting on huge losses. Yesterday, I also mentioned that the ECB would actively support Italy's bond auction.

For the last two weeks, the market has been caught in a tight trading range. A week ago, the Fed announced the continuation of their zero rate policy through 2014. Stocks surged to a new relative high, but those gains were erased the next day. Yesterday, the market gaped higher on the open and it challenged that high midday. Profit-taking set in late in the day and resistance held. Yesterday’s gains all came overnight. During the first couple of hours, stocks barely budged.

The market surged higher on Tuesday and investors started the year off on a positive note. Since then, the momentum has stalled and stocks have not been able to move higher in the midst of strong economic news. This morning, the Unemployment Report showed that 200,000 new jobs were added in December. Initially, the S&P 500 rallied on the news. Decent job growth was already priced into the market and stocks are drifting lower. Yesterday, ADP employment exceeded expectations and initial claims declined more than expected. ISM services and ISM manufacturing both came in ahead of estimates.

Last week, the market broke out above resistance when the jobs report came in much better than expected. PMI's in Europe and Asia were also above estimates. This is a very quiet news week and the momentum should allow stocks to inch higher. Domestic economic conditions have been outpacing the rest of the world. ISM manufacturing and ISM services came in better than expected last week and GDP rose 2.8% in the preliminary reading. The optimism is growing. Credit concerns in Europe have subsided. The ECB provided a massive liquidity injection and interest rates have declined.

Over the weekend, China released its PMI and it poked back above 50. That was better than expected, but it is far from robust. Europe's PMI declined for a fifth straight month and it came in at a dismal 46.9. The focus has been on China this morning and stocks are pushing higher on the news. This will be a very busy week for economic releases in the US. ISM manufacturing rose to 53.9 and that was slightly better than expected. On Thursday, ADP employment, ISM services and initial claims will be released.

*Just a short rant tonight. Hopefully, if time permits, I will be back later with some additional reading.
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I hate to say this about some of my fellow options traders, but I can’t tell you how much I abhor those in the industry (you know who you are) that absolutely ruin the [...]

The overnight news was very light, but the action will heat up next week. The market has had a 2 point range on the S&P during the first 30 minutes of trading and it looks like we are in for a quiet day. The market is closed Monday and China/Europe will release their PMI's. HSBC released its PMI for China and it came in at 48.7. This is the second consecutive monthly decline in manufacturing. Some analysts believe that China will lower its bank reserve requirements this weekend.

Yesterday's rally felt a bit "fluffy". China's PMI came in better than expected, but it was still weak. Their stock market has been closed and when it reopened last night, it declined 1.3%. Furthermore, Europe's PMI fell for the fifth straight month. The 26 point S&P 500 rally could not be justified by the news. Throughout the day, stocks drifted lower. Overnight, China's Finance Minister said that he sees a relatively difficult first quarter. He sees downside pressure on the economy, weakening external demand and rising costs.

Last Friday, news leaked out that S&P was going to release its European credit review. The downgrades were in line with expectations and the market handled the news well. European markets were open yesterday and they traded slightly higher. The biggest concern was that France might get downgraded two notches and that Germany might also get downgraded. This did not transpire. France was only downgraded one notch and Germany was not even placed "on watch".

After a few down days, the market woke up. PMI's in Europe and Asia were decent and a Greek haircut agreement seems close. Even though the market is challenging resistance, it has not advanced in the last 10 days. The ECB's "bazooka" worked and confidence has temporarily been restored. Investors are less fearful of a financial crisis. Some analysts believe that the ECB's balance sheet will grow to €1.5 trillion in 2012 (biggest ever). Central banks around the world are backing the ECB and this is an "all in" strategy. If Europe fails, we all fail.