Stocks are likely to be more subdued Tuesday, taking their cue from the bond market and keeping a wary eye on Europe.
The U.S. stock market shot higher Monday, following world equity markets higher on optimism that European officials may move more quickly toward a closer fiscal union. The 16 percent jump in Black Friday weekend retail sales also helped boost sentiment.
"The credit markets did not take this bait at all. They were down, and Treasurys are now back flat on the day," said Brian Dolan of Forex.com.
Euro zone finance ministers meet Tuesday, and there is also an 8 billion euros Italian bond auction that traders are watching. In the U.S., S&P/Case-Shiller home prices are released at 9 a.m. EST, and consumer confidence is reported at 10 a.m. Tiffany reports earnings before the opening bell. There are also several Fed speakers throughout the day.
The Dow Monday was up 291 at 11,523, a 2.6 percent gain, and the S&P 500 jumped 2.9 percent to 1,192. The Nasdaq rose 3.5 percent to 2,527. Traders said stocks had become extremely oversold after last week's near 5 percent decline.
The euro, at one point, was up 1 percent Monday, after last week's 2 percent decline. But by late Monday, it was off its highs at 1.332, a 0.6 percent gain.
"I'd call it a flash in the pan," said Dolan. Dolan expects to see the euro, and risk assets, trade sideways.
RBS Treasury strategist John Briggs said the Treasury market, at first slipping on the euphoria that lifted stocks, did an important about face during the day. The 10-year yield rose to 2.08 percent early Monday, but as buyers stepped in the yield slipped, finishing at 1.958 percent.
"The (bond) market's not really buying into what stocks are selling today. Neither are the European bond markets. Their yield rise contributed to our yield fall," he said.
"But don't get me wrong. The (retail sales) data was good. Sales were good, whether you believe that can keep on going or not, or that it's drawing forward spending from the first quarter. The data was still good," said Briggs.
Briggs said, however, if the stock market continues to rise, asset reallocation would drive bond yields higher as investors sell. "If stocks (the S&P) go to 1275, it's going to be hard for Treasurys to resist that," he said.
Art Cashin, director of floor operations at UBS, said traders were skeptical of the retail sales data, even as reports came in through out the day that so-called "Cyber Monday" was going strong. Traders also say the steep discounting used to lure in buyers could hurt retail margins, and the rally in retail stocks could be short-lived.
"The reason people were in the stores Friday was to get heavily discounted goods. When the goods ran out, so did the crowds," he said. "I'm not sure we're going to see these numbers upheld" through the holiday season.
Cashin said traders also noted the sense of urgency in President Obama's voice when he spoke Monday afternoon, after meeting with European union officials about the sovereign crisis and other issues. "(Treasury Secretary Timothy) Geithner has been anxious about this all along, and the president came out and said we'll do what we can to help," not that there's a resolution, he said. Cashin noted the volume was below average as well, a sign to stock traders that the rally lacks conviction.
Euro zone finance ministers meet over two days. Dolan said he's watching to see if the euro zone finance ministers can come together and work out a plan to increase the fire power of the ESFS (European Financial Stability Facility).
Also on the agenda is the 8 billion euro loan installment that Greece needs in order to prevent default.
European leaders are under increasing pressure to find a solution to the spreading crisis. Last week, a German debt auction failed to find sufficient buyers, driving interest rates higher.
On Monday, the Organization for Economic Cooperation and Development said the euro crisis is a risk to the world economy and that Europe is at risk of recession. Moody's also released a report warning that Europe's sovereign debt crisis could result in countries defaulting or leaving the euro zone.
Several Fed officials are speaking on Tuesday. Atlanta Fed President Dennis Lockhart speaks on the economic outlook at 12:30 p.m. EST in Atlanta. Fed Gov. Janet Yellen speaks at 11:30 a.m. on the global economic recovery, and Gov. Sarah Bloom Raskin moderates panels at the Asia Economic Policy Conference at 12:15 p.m. in San Francisco. Minneapolis Fed President Narayana Kocherlakota speaks at 8 p.m. in Stanford, Calif.
Follow Patti Domm on Twitter: @pattidomm