The stock market has made some very unusual moves over the last few days. First, oil has rallied right along with the U.S. dollar. Then oil held firm when stocks declined sharply on Wednesday. The safe haven of gold has sold off, even with the escalation of the Italian debt situation. Banks have been weak, even thought the stock market at large has rallied on good earnings and the hope that new leadership in Greece and Italy will actually help.

In many ways, the situation is downright confusing. Oil is certainly gaining some strength from the latest reports on Iran's nuclear ambitions. Improving economic conditions in the U.S. are also helping oil. That's keeping prices strong, even in the face of a stronger U.S. dollar.

Gold is in more of a quandary. There's been some speculation that some institutional investors are unwinding gold positions to raise cash. MF Global would be one possible suspect. So would the EU. The fundamentals for gold haven't changed, and investors can use weakness to enter positions.

Copper may be a better measure of the global economy. Copper prices have been down, and shares of Freeport McMoran (NYSE:FCX) have backed off recent highs at $43. But the stock has rallied from $30 since the October rally began, so we should probably view the recent weakness in both copper and FCX as corrective, rather than the start of a new downtrend.

It's being reported that Italy has passed a new budget. That clears the way for Prime Minister Silvio Berlusconi to step down. He better. The market clearly wants his resignation. The euro is already stronger after the vote. And the hope-based rally could turn into a relief rally if things progress smoothly in Italy. I'm encouraged by the market's resilience, but let's not forget that prices can turn quickly. I will be watching both oil and the bank stocks to determine the market's next move.

Some have suggested that Bank of America (NYSE:BAC) is a good proxy for the U.S. economy. It has the biggest exposure to the U.S. housing market and to consumer banking, and has the least exposure to Europe of the big U.S. banks. Morgan Staley (NYSE:MS), on the other hand, has the most exposure to Europe. Bank of America has just $1.5 billion in exposure to Italian bonds, and that certainly sounds manageable, even though it's hard to take anything at face value when it comes to the banks.

U.S. banks’ total direct exposure to Italian borrowers is reported to be $36.7 billion. But the Bank for International Settlements says that U.S. banks have $232 billion in indirect exposure. Unfortunately, I don't know what "indirect exposure" means. And it's not like the banks will be forthcoming.

Still, BofA has been trading terribly over the last few days. But you may recall that I said last week that BofA won’t become interesting until it hits $6, and it did that yesterday.

BofA has tangible book value somewhere around $12. There's some compelling upside potential for the stock, but it's very difficult to tell how long it could take for people to realize that. Unfortunately, investors need to buy on weakness to get the best entry. And that's not necessarily the most comfortable action to take.

What to Watch for Next

Yields on French bonds were on the rise yesterday. That's exactly what is meant by contagion. Europe can't afford to bail out Italy, let alone France — at least not with the way the EU is currently structured. It's being suggested that the European Central Bank needs to backstop all European debt, much in the same way that the Fed did in 2008. Unfortunately, the European Central Bank doesn't have the power to do this, at least not without approval from EU member nations. That approval process would mean another round of meetings and votes that would be utterly painful.

We'll see. The Euro debt saga still has a ways to go….

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Have a great weekend,

Ian Wyatt

Editor, Daily Profit

Published by Wyatt Investment Research at