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Hopes for an End-of-Quarter Rally

End of quarter rally? The talk on trading desks this morning is hopes for a rally based on simple math: Stocks have dramatically underperformed bonds this month—and this quarter. Simply put, pension funds should buy stocks and sell bonds going into the end of the quarter.

How much? Goldman Sachs, in a note issued at the end of last week, noted that equities had underperformed Treasurys by 25.5 percent this quarter and by 10.6 percent this month.

Still, don't kid yourself: I'd take clarity on Europe over a rebalancing any time, and that—more clarity on Europe—will be the main driver of stock action.

Euro zone hopes a little less vague? Speaking of Europe, markets are higher Tuesday, partly on hints, reported yesterday on CNBC, that there are discussions under way to create a special purpose vehicle (SPV) that might issue bonds and buy European sovereign debt. The SPV would be issued by the European Investment Bank and could be used to leverage up money from the European Financial Stability Facility (EFSF). (The EFSF is a vehicle financed by euro zone members, created in May of last year, that's designed to provide financial assistance to euro zone states suffering economic difficulty.)

The advantage: The SPV buys stressed countries time to sort out their budget issues and keeps their funding rates down.

But there are other plans floating around.

Elsewhere:

1. This is a big week for the euro zone, with Slovenia voting today on expanding the EFSF, Finland tomorrow, and Germany on Thursday. Greece will vote on its (hugely unpopular) property tax today. The debate should start later this morning. Greek Prime Minister George Papandreou will dine with German Chancellor Angela Merkel in Berlin.

2. What a difference a week makes. Germany’s DAX is up more than 7 percent this week (including this morning), wiping out all of last week’s losses and near its highs for the month (!). Quite a seesaw it has been too, as last week’s losses nearly eliminated all of the previous week’s gains. Markets in Spain and Italy have also recovered all of their losses from last week.

3. Walgreen rises 3 percent after beating estimates (57 cents a share vs. 55 cents a share consensus) on higher store traffic and a 4.4 percent rise in same-store sales. The drugstore also cautioned that there is still "no substantive progress" on renewing its deal with pharmacy benefits manager Express Scripts. Back in June, the companies said talks for a contract extension broke down.

4. Beazer Homes USA may get a boost after hedge fund Highbridge Capital Management revealed it has taken a 5 percent stake in the homebuilder.

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