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Good morning. For the last three years, all of the major stock market rallies have ended abruptly courtesy of the European debt crisis that seems to know no end. Although the big declines in 2010, 2011, and again in 2012 also coincided with the "sell in May and go away" seasonal period, all three dances to the downside were helped along in no small part by the crisis that just keeps on giving the perma-bears a raison d'etre. So, it wasn't exactly a surprise to see stocks tank on Monday on the back of - what else? - renewed worries about Europe.

Frankly, the U.S. got off easy on Monday as the stock bourses of France, Germany, Italy, and Spain were all pounded for losses of 3% or more. So, as I boarded my plane to return home late Monday afternoon, the thought that went through my mind was "here we go - it looks like deja vu all over again (and again)."

As I was stowing my carry-on bags, powering down my electronic devices, and returning my seat and tray table to their upright, locked and most uncomfortable positions, I started to run down the market's current situation in my mind. First, one has to admit that stocks have enjoyed a pretty darned good run since the beginning of the year and the indices have also put up impressive numbers since the middle of November (when, by the way, everyone and their grandmother was apparently telling us all to ignore the fiscal cliff and "buy 'em!"). In the process the now famous "overbought" condition was created and both my short- and intermediate-term oscillators had become lined up in their "warning" zones (note that the best moves usually come when these cycles are in sync). And just before I put my legal pad in the seat pocket in front of me I scribbled down a reminder to review market sentiment, the momentum, all three trends cycles I follow, and the fundamentals such as rates, inflation, earnings, valuation, the economy, etc.

But as I continued the rundown of the important market factors I had going in my head, I was interrupted by yet another demonstration of the aircraft's safety features and was reminded how many lavatories and exit doors were onboard. I was also informed as to our flying time back to Denver and the fact that we'd get a good view of the Grand Canyon, Bryce and Zion National Parks, Lake Powell, and if the clouds cooperated, a great look at Monument National Park as the sun was setting. So, despite the fact that I had flown almost the exact same route two weeks prior, I was looking forward to the views. But first, I had to get back to the matter at hand - the question of whether or not Europe was going to create another big downdraft in stocks.

As the plane climbed above 10,000 feet and the use of portable electronic devices was no longer a crime, I continued my review of the market. But before my laptop could finish powering up, the situation became quite clear: the trend was strong but extended, the indices were overbought and quickly approaching all-time highs, the cycle forecast was negative in February, and market sentiment was becoming a problem. As such, stocks were indeed "set up" rather for a pullback. And perhaps most important was the fact that everybody in the game knew that it was time to go the other way for a while.

In addition, the masters of the universe in hedgieland remained inexplicably bearish as many of the deep thinkers in the biz continued to publicly fret about the global economy. So, it the occurred to me that if I was a bear, this is exactly where I would make my stand. And since every trader on the planet knows how to "play" the Europe crisis by now, I figured that the scandal in Spain and the growing political issues in Italy might just put the bears back in business. And while my indicators told me that the damage wasn't likely to be too severe, I feared that the boyz and their computer toys might be able to finally get something serious going to the downside.

However, instead of another whoosh lower, stocks rebounded nicely on Tuesday. What was interesting is that there wasn't any big economic news to celebrate, no blow-out earnings, nor even a new product from Apple or Google. Nope, stocks just started higher and finished even higher. Just like that, the bear case didn't seem quite so bad as Europe bounced on "waning political instability," better ISM Services numbers, and some good earnings from across the pond. So in response, Monday's train wreck was all but erased.

What does it mean, you ask? Does Tuesday's reversal of Monday's reversal (of Friday's gains) mean that the bears have gone back into hibernation and that new highs are ahead? Does the bounce mean that the pullback has been cancelled? Or does it mean that the bears are merely waiting for the next headline out of Europe to appear? Will it be deja vu all over again - or not?

As you are likely aware, I don't play the prediction game. So, instead of pounding the table about what we should expect next, I'm going to do what I always do ... I'm going to watch the market action and my indicators carefully in the coming days to see if Ms. Market won't tell me what she intends to do next. But for now, my models suggest that we should continue to give the bulls the benefit of the doubt.

Turning to this morning ... Despite a surge overnight in Japanese stocks and a couple of M&A deals here in the U.S., concerns about Europe continue this morning. It appears that the scandal in Spain (the accusations appear to be gaining traction), the election in Italy (Berlesconi's party is gaining in the polls), as well as the upcoming EU summit and ECB meeting are combining to keep traders on edge.

Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: +0.04%
- Hong Kong: +0.47%
- Japan: +3.78%
- France: -0.67%
- Germany: -0.45%
- Italy: -0.89%
- Spain: -0.44%
- London: +0.35%
Crude Oil Futures: -$1.19 to $95.45
Gold: +$1.50 to $1675.00
Dollar: higher against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 1.990%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -2.59
- Dow Jones Industrial Average: -10
- NASDAQ Composite: -6.84
Thought For The Day ...

"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." John Maynard Keynes

Positions in stocks mentioned: none
Source: Daily State Of The Markets: Deja Vu All Over Again (Or Not)?