The stock market's three-day rally is at risk of tripping up on new hurdles from Europe.
The S&P 500 has gained 3.4 percent so far this week, after last week's 6.5 percent decline. But it would have been higher, were it not for a Financial Times story published ahead of Tuesday's market close, highlighting disagreement among euro zone countries over the Greek bailout and the role of the private sector.
"It seems like it was kind of a vapor run today. To see us give some of it back on some of the same vapor — month end and quarter end trading — does not seem like a stretch," said Keefe Bruyette trader Pete McCorry.
Also just ahead of Tuesday's close, the New York Times Deal Book reported that European Commission President Jose Manuel Barroso is expected to give details early Wednesday on a new financial transaction tax, favored by German and France but opposed by other European countries. It is also opposed by the U.S..
Traders credit buying by institutions ahead of quarter end for some of the pop in stocks this week. They also say there was plenty of short covering. "The things that were the weakest going in saw the quickest reversals," said Art Cashin, director of floor operations at UBS.
Stocks were helped this week by favorable news on Europe's efforts to deal with its crisis. One of those was a report Monday by CNBC's Steve Liesman that European officials were considering, among other options, levering the EFSF (European Financial Stability Facility) so that it could be used to buy bonds and shore up the continent's banks. Expanded powers for the EFSF are currently being voted on by the 17 euro zone countries.
What to Watch
Traders will be watching developments in Europe, including a Finnish parliamentary vote on the European bailout fund, EFSF.
Fed Chairman Ben Bernanke speaks at 5 p.m. ET on emerging markets at a Cleveland Clinic speakers series event. Other Fed speakers include Kansas City Fed President Thomas Hoenig, who speaks at 7:30 a.m. to the Kansas City Chamber of Commerce, and Boston Fed President Eric Rosengren, who speaks at 2:40 a.m. in Stockholm at the Swedbank Economic Outlook Seminar.
Durable goods data for August is released at 8:30 a.m. and the Treasury auctions $35 billion in 5-year notes at 1 p.m.
Darden Restaurants , Family Dollar and McCormick report earnings before the bell, and Mosaic reports after the close. Amazon.com is expected to announce a new low-priced tablet to compete with Apple's iPad at 10 a.m.
But it will be the headlines from Europe that should determine market direction, said Randy Frederick, director of trading and derivatives at Charles Schwab.
He also says the rally is not trustworthy. "It's definitely not real... you've got to look at the market and where we've been since early August. We've been in this really tight mode with the S&P in a 100-point range. What we see is our markets driven almost essentially by what's happening in Europe. If the news is good, the market takes off. If it's not, they head lower," he said.
He said the S&P has strong support at 1,120 and meets resistance when it gets close to 1,220. "This is one of those technical zones, and it's just as solid as I've ever seen," he said.
"On the upper side, the resistance line, which is 1,220, is very much in line with the November highs of last year. We've seen reversals on that point back in April of last year and also November," he said.
The S&P rose 12 to 1,175 Tuesday, but had been as high as 1,195 before the Financial Times report. The Dow closed up 146 at 11,190 but it had been up more than 300 points.
"The point is there's no real reason to be terribly bullish or terribly bearish on the market right now. We're just sort of stuck in the sideways zone, and I don't think we're going to break out of it until there's a resolution in Europe," Frederick said. "The more likely scenario is Greece is going to default on its debt. We'll probably then have a very sharp sell off and that would be an opportunity to buy."
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