In a low volume market with almost no liquidity anything can happen.  In the past few days there have been sellers of the S&P500 at the 50-day moving average, however,  and the market will need a catalyst to bust it higher and spook the shorts.

Lot’s of chatter over the weekend that the ECB’s new collateral and three-year lending facility is a backdoor “big bazooka” as banks can now put on a massive sovereign carry trade thus providing the backstop the markets have been looking for.  We’re skeptics but will let the markets decide on this one.

In the past few months,  bank stocks have been rewarded by announcing reductions in sovereign exposure,  not increases.    We don’t fully dismiss this positive scenario, however,  as sovereign risk is all about market confidence and, we believe,  at least Italy has a chance to regain it.    Watch sovereign spreads, mainly in Spain and Italy,  and equity prices of the large European banks as a clue that this scenario is unfolding.

Add North Korea to your radar screen.   Monitor for regime stability in the short-term.  More certain uncertainty to an already uncertain 2012.

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