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By Lawrence G. McMillan

Yesterday was a strong day, backed by technical factors across the board.  But forget about it, because tonight the market is getting absolutely crushed.  S&P futures we down as much as 32 points, and are down about 26 right now.  The problem?  Italian interest rates are rising dramatically – particularly noticeable, apparently, on the 10-year notes.  The media is saying that the Italian bonds yields are a "crisis levels," whatever that means.  The irony is that, yesterday, the Italian Prime Minister eventually said he would leave – something that the market ostensibly wanted.  The trigger for the selloff, however, was a raising of the margin requirements for Italian debt, which got selling started, and it has just snowballed from there.

This all seems so peripheral, but as long as our markets are held hostage to these sorts of news items out of Europe, analysis of any kind – technical or fundamental – is difficult.  For the record, the $SPX close above 1265 was positive, but it is now going to open at 1250 or so.  I wouldn't really think there will be another retest of the 1220 level, but these selling sprees get carried away, so nothing is out of the question.

For what it's worth, equity-only put-call ratios, breadth oscillators, and $VIX are all bullish.  Breadth oscillators are somewhat overbought, but that isn't what's causing tonight's selling. $VIX dropped well below 30, which should be an intermediate-term buy signal.  However, it will surely jump more than 3 points higher at today's open (using the near-term futures as a guide; those futures are up 2.80 right now).

In summary, early today the bullish technicals are going to be overwhelmed by the bearish Italian bond market.  We'll have to wait to see if bullish investors will move back in at this morning's lower prices, or if they will be frightened into submission by the European markets.

This market commentary was taken from this morning's Daily Strategist Newsletter.

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