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Italy Could Trigger Early End to Santa Claus Rally

On Tuesday, investors were again looking at the strength in the US market and wondering if that strength would persist. “The US again looks like the best house, albeit in a bad neighborhood,” says trader Patty Edwards.

The Fast Money top trader is referring to the latest economic data which showed U.S. consumer confidence rose more than expected in December, hitting an eight-month high.

Also, late last week, new reports showed U.S. single-family home sales rose to a seven-month high in November and the supply of houses on the market hit their lowest levels in 5-1/2 years.

All told, investors have interpreted the results as signs of a budding recovery in the U.S., and they have bid the S&P 500 higher. In fact, the S&P is currently positive for the year and above its 200-day moving average. The question becomes – will investors continue to buy?

“It’s all about Italy,” says trader Stephen Weiss. “They’re pricing a lot of debt over the next two days – and yields are over 7%. That’s expensive.”

That gives Weiss pause. He thinks if the bond auction goes very poorly, it reminds investors that Europe remains very fragile and Weiss thinks it puts an end to the current Santa Claus Rally.

“But absent of a disastrous auction, I think we trend higher -- if only into year’s end,” Weiss adds.

Patty Edwards agrees entirely. “There’s been a lot of correlation in markets,” she reminds. A bad auction in Italy is probably not something the market could shrug off. And unlike some pros who expect ‘de-coupling’, Edwards expects the US to remain tethered to headlines out of Europe.

Trader Steve Cortes is a little more bearish. “I’m not optimistic that the US rally can persist at all when the rest of the world trades so poorly,” he says.

And Jon Najarian is perhaps most bullish. He compares Italy to a hurricane that isn’t as destructive as feared. “If Italy is a storm – it’s not a strong storm. It’s not a category 3. The Vix around 22 tells me that!”

What do you think? We want to know!

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Trader disclosure: On Dec 27, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Weiss owns EUO; Weiss owns AAPL; Weiss owns KO; Cortes is long K; Cortes is short EUR; Cortes is short XRT; Cortes is short CSX; Cortes is short UNP; Cortes is short IYT; Najarian has long call spreads in APPLE (AAPL); Najarian has long call spreads in AK STEEL (AKS); Najarian has long call spreads in US STEEL (X); Najarian has long call spreads in PNC FINANCIAL (PNC); Najarian has long call spreads in MICROSOFT (MSFT); Najarian has long call spreads in RIMM; Najarian has long call spreads in CNI; Najarian has long call spreads in CP; Najarian has long call spreads in NSC; Najarian is long CIGX; Najarian is long CBOE; Najarian is long CM; Dicker is long oil

For Doug Kass
Kass is long GS; Kass is long MSFT; Kass is long HD; Kass is long LOW; Kass is long F; Kass is long GM; Kass is long TROW; Kass is long BEN; Kass is long LM; Kass is long LNC; Kass is long ETFC; Kass is long IFF; Kass is long K; Kass is long STI; Kass is long XOM; Kass is long SLB ; Kass is long SHLD puts; Kass is short SPY shares

For Dennis Gartman
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For Patty Edwards
Trutina Financial is long APPLE (AAPL)
Trutina Financial is long TGT
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Trutina Financial is long MICROSOFT (MSFT)
Trutina Financial is long UTILITIES SPDR (XLU)
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Trutina Financial is long T

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The following companies have been investment banking clients of Piper Jaffray during the past 12 months: ACOM, DANG, DRIV, MOBI, YNDX, YOKU

Other material conflicts of interest for Gene Munster or Piper Jaffray regarding companies in my universe for which I am aware include: DANG, MOBI, YNDX, YOKU: underwriting

Piper Jaffray received non-investment banking securities-related compensation from the following companies during the past 12 months: ACOM, DRIV

Piper Jaffray makes a market in the securities of the following companies, and will buy and sell the securities of these companies on a principal basis: AAPL, ACOM, AMZN, BIDU, DANG, DRIV, EBAY, GOOG, IACI, LOGM, MCHX, MELI, MOBI, PRTS, RLOC, SINA, SOHU, VCLK, WWWW, YHOO, YNDX, YOKU

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