A Monday follow-through of Friday's late-session rally failed to materialize as risk aversion remained the emotion of the day. Friday's turn was driven by hopes for a communique release of concrete directives from the weekend Group of 7 meeting; instead, the vague assurances lacked sufficient teeth to soothe traders' fears of sovereign defaults. So too, reports that Fed Chairman Bernanke was at work penning a detailed exit strategy of monetary tightening for enactment once the economic recovery finds firmer footing, drove skittish investors further into safe-haven assets. Reports this morning that the EU President Trichet has cut short his trip to Australia to return for a Thursday European Central Bank meeting fed speculation that a bail-out might be brewing, sending premarket futures higher.

Yesterday's trade saw the DJIA close below 10,000 for the first time since November 4, 2010, as the index shed almost 104 points, or 1.0% to close at 9908. Only two of its components finished higher, Home Depot (NYSE:HD) up 2.2% on a Morgan Stanley (NYSE:MS) upgrade, and Hewlett Packard (NYSE:HPQ) up 0.6%, even as the tech sector eased 0.6%. Nasdaq shares dropped 0.7% to 2126, with the S&P500 falling below its 1075 level with a 0.9% decline to 1066. Volume on the NYSE was a modest 1.085 billion shares, with declining issues ahead of advancers by a two-to-one margin. The Vix, "fear factor" index, gained 1.5% to 26.51.

Continuing the market's recent trends, fear held sway over asset allocation on Monday, driving investments into areas perceived to offer the least risk, such as US treasuries, which managed price gains despite the week's heavy auction calendar of $81 billion in 3-year notes, 10-years and 30-years. Strength in earnings reports as well as analyst upgrades failed to turn markets higher, even as ExxonMobil (NYSE:XOM) was upgraded by Collins Stewart, Disney (NYSE:DIS) by JP Morgan (NYSE:JPM), Priceline.com (NASDAQ: PCLN) by Susquehanna, CME Group (NYSE:CME) by Jefferies, and Autozone (NYSE:AZO) by Citigroup (NYSE:C). Better-than-projected interims were also provided by CVS Caremark (NYSE:CVS) and Hasbro (NYSE:HAS) and failed to counter negative news items.

Last week's climb in the US dollar, which had marked its strongest close in almost seven months on Friday, moderated yesterday, as the greenback eased 0.04% against a basket of currencies. The modest improvement permitted gains in commodities and dollar-linked natural resource plays, sending the broad-based DJ-UBS commodities index up 1.1%; crude up 70 cents to $71.89; and gold up $13.40 to $1066.20. Nevertheless, basic material sector shares remained under pressure of global recovery uncertainty, dropping 1.7%.

The S&P500 suffered losses across all ten sector groupings. Financials, suffering from simmering debt issues in southern European nations and the attendant fears of banks'capital-raising needs, dropped 1.9%; basic materials 1.7%, utilities 1.1%, industrials 0.9%, oil and gas 0.8%, telecommunications 0.7%, tech 0.6%, consumer goods 0.5%, health care 0.4%, and consumer services 0.3%.

Trichet may be confident that Greece will reduce its debt percentage of GDP, and the EU may indeed issue a bail-out promise later this week, helping to alleviate current risk concerns. Indeed, year ago comments from Germany's finance minister, averring the EU would step in to help its members, successfully calmed fears over Ireland's debt situation, However, skeptics fear that the EU's fundamental flaw of lacking enforcement options for any financial austerity measures may limit it from more than bandaid fixes. The deficiency was compounded by yesterday's warning from Greece's public sector union of possible further strikes.

Today's economic calendar remains light, with the government's primary post a 10:00 am report on December wholesale inventories, expected up 0.6% after the 1.5% rise in November. Among key earnings reports of the day are: Disney (NYSE:DIS), Coca-Cola (NYSE:KO), XL Capital (NYSE:XL), NYSE Euronext (NYSE:NYX), Molson Coors (NYSE:TAP), Baidu (NASDAQ:BIDU) and International Flavors and Fragrances (NYSE:IFF).

According to our analytics team, Whether this morning's expected bounce proves to be only a rebound in an otherwise-beginning bear market, or the first sign of a base from which to launch a multi-day stock rally, depends in part on how high this morning's gains takes the DJIA. Yesterday we advised the DJIA needed to top 10,070 and stay there to confirm a base was forming at the DJIA 10,000 level. The DJIA did not come close to that intraday high, instead stalling around 10,030. Thus the hurdle to surmount declined. Now the number to exceed is DJIA 10,000. It will take a rise of 100 points today to confirm that it may be safe to go back into the long equities water. To examine the list of stocks changing trends in the last week, please click on http://www.mysmartrend.com.

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