Our markets had a strong day Friday on increasing volume on hopes of a European debt solution being reached this weekend. But Sunday, no solution was reached. European leaders stated they were making progress and promised to continue to work toward a solution.

Merkel stated after the meeting “Today, we will not undertake any decisions, but will undertake preparatory work.” Translation…no agreement could be reached.

The fight is over what writedowns the EU banks and private institutions should take on Greek debt and how to recapitalize the banks quickly. Now that the Greek economy has become even worse, Germany wants larger writedowns and more private sector responsibility.

The European leaders said they have ruled out tapping the European Central Bank (ECB) to increase the rescue fund. If they hold this stance, this is not good for the Euro or the European markets. After the Greek banks, many French banks (ex. BNP Paribas and Societe General) and the German banks (ex. Deutsch Bank) have significant exposure (see chart) to Greek sovereign debt.  The 2nd Summit is on Wednesday.

Greek Bank Bondholders

In response, the Euro is weaker against the other major currencies. Our equity futures are down.

I hate to say our markets are dependent on a European solution, but they are, especially the financials. This is probably why the FED is throwing around another stimulus plan even though some of the economic indicators are slowly recovering.

Even though the strong showing Friday may lead investors to believe we have bottomed out, the internals tell a different story. Selling has not abated, and has remained strong throughout this rally along with the increase in buying. In fact, over the past few weeks investors have pulled billions out of equity mutual funds. This demonstrates distribution (selling) rather than accumulation (buying).

You should remain cautious and any buying should be selective. In lieu of a stimulus announcement by our FED, earnings are the only thing that could drive our markets higher. Thus far, they have been mixed. Among the companies reporting earnings today are Caterpillar, Texas Instruments and Netflix.

In overnight trading (Sunday 9:00 p.m. CST) the Asian equity markets are in the green. The US dollar is up against the other major currencies. Silver and oil are both up marginally, and gold is down marginally.

Our US equity markets are in the red. The DOW futures are down -35 points, the S&P futures are down -5 points and the NASDAQ futures are down -8 points.

In spite of the European overhang, our markets continued rallying yesterday on lukewarm volume. Most earnings were positive and a few provided positive outlooks. Also, heavy Mergers and Acquisition (“M&A”) activity is driving the market. Netflix reported after the bell and significantly disappointed the market. It was down -$33/share or 28% in afterhours trading.

Tuesday, Texas Instruments, Amazon, UPS, Peabody Energy, Cummins, du Pont and US Steel all report earnings. We have 43 companies in the S&P reporting today so it will be busy. We have 51 companies in the S&P reporting on Wednesday and 62 on Thursday.

Short term, the markets have been showing strength. Up Volume was in the high 80s on the NYSE. On the NASDAQ, it was in the low 90s and qualified for a 90% Up Volume day. All of the technical indicators are showing overbought readings. This means that a short-term pullback is likely. It will depend upon earnings and Europe.

If selling accelerates on high volume, this would be bearish. However, if we get a weak pullback on light volume, this would be bullish and a good entry point. Midterm, we are still in a downtrend and selling has not gone away, even with this rally.

The European rescue is heating up quickly. The banks are fighting back against the European leaders on the size and scope of losses they will agree to incur. European leaders are still trying to figure out how to avoid triggering the credit default swaps (“CDS”). This was the same scenario that caused the banking crisis of 2008 and the collapse of Lehman.

Additionally, Spain is now reporting that it will struggle to meet its deficit reduction targets for the year as their economy slows. This further threatens contagion on the continent.

In overnight trading (Monday 9:58 p.m. CST), the Asian equity markets are mixed with Japan and China both in negative territory. The US dollar is up against other major currencies. Gold is flat and oil and silver are both down marginally, partially due to the stronger dollar.

Our US equity markets are down. The DOW futures are down -29 points, the S&P futures are down -4 points, and the NASDAQ futures are down -7 points.

Go Rangers!!!

Investors around the world are waiting on an EU decision. The Asian and European markets sold off yesterday as fears about a solution were put on hold. Our markets were all over the place but were more fortunate than the foreign markets.

The good news is our markets came off their lows of the day and closed near their highs of the day. The DOW and S&P finished in positive territory, but the NASDAQ closed in the red. Our markets are trying to find direction, but very time they try to rally, new sellers enter the markets.

Up Volume was in the mid 60s on the NYSE, but Down Volume barely won on the NASDAQ registering in the low 50s. Total volume was unimpressive on both exchanges. Compared to the recent volatility, it was a dull day.

The internals of the markets are weak right now after bumping up against the upper trading range. Until we get buying with an increase in volume, a sustainable rally is unlikely. However, this could happen if Europe agrees on a fix (even though it won’t work in the long run).

If the markets do rally, energy stocks should do well. On the radio show today, John Sheely, a commodities and forex trader, was talking about the high profit margins with the “crack” spread by refiners. Companies like Tesoro and Valero are worth examining.

But again, unless there is an agreement in Europe, the markets will struggle to go higher. In fact, they will likely go lower and selling could accelerate. Pay close attention to volume, that will be the key.

In overnight trading (Thursday 9:20 p.m. CST) the Asian markets are mixed. Gold, silver, and oil are all in positive territory. The US dollar is flat against the Euro the Yen , but down against Pound.

With the exception of the London exchange, the European futures are in negative territory. Our US futures are in positive territory. The DOW futures are up 29 points, the S&P futures are up 3.2 points, and the NASDAQ futures are up 6.75 points.