I believe that the market is poised to rally if we can get a reprieve from the European woes. Sentiment is neutral, seasonality is positive and investors as a group are conservatively positioned. I don't believe we need to see a solution out of Europe for a rally, just some quiet for a little while.
Unfortunately, the EU summit brought more of the same. The Germans managed to squeeze more austerity and budgetary controls out of EU nations in return for more rescue plans that have no way of getting funded. The tricky part of analyzing these rescues is that the ECB has the power to aggressively intervene in bond markets. It was not unreasonable to believe that in return for further budgetary discipline, the ECB would intervene more aggressively. This is not the case as the ECB is allowing spreads to blow out again today. Further complicating the issue is the fact that every time we face the abyss they finally do intervene, but just enough to keep us in limbo.
In the short run we are overbought and will remain so through Wednesday. The overbought reading will likely put a lid on the upside in the early portion of this week. While the very short term might be challenging, I believe that the odds favor the bulls in the coming weeks. However, if the situation in the EU does not improve it will likely be a rally to sell into.