The equity market broke down yesterday.  That's right.  The S&P 500, with a 1.3% gain, broke down.

We don't mean, of course, that the market broke down in a technical sense.  What we're driving at is that the market broke down and allowed itself -- if only for a day -- to trade on something other than Europe.  How do we know?  Well, it isn't that we know for sure, but the disparities in the marketplace suggested as much.

The spread between the French and German 10-year bonds hit a record high of 120 basis points while Italy's 10-year bond got hammered and flirted with 6.00%.  These worrisome indications would normally feed a risk-off trade, yet stocks powered higher, led by the financials and transports, U.S. Treasuries softened, and commodities, namely oil and copper, saw a big jump.

The inference is that yesterday's action was driven more by thoughts on the economy than it was by thoughts on the EU's all-important summit.

There was the blowout earnings report from Caterpillar (CAT), which gets nearly 70% of its revenue outside the U.S.; there was the expansionary manufacturing reading out of China; there was the new plan to help qualified homeowners refinance mortgages held by the GSEs; there was ongoing chatter about the Fed possibly entertaining more quantitative easing; and there was a sense that whatever comes out of Europe is at least going to be an improvement on the July 21 bailout plan.

Add it all up and we got the sense yesterday that the market broke down and allowed itself to think that a global recession can be averted.  That thought we suspect spurred some chasing action by underinvested participants fearful of missing out on further gains.

That was yesterday.  In this day-to-day market, there is no telling what will turn out to be the prevailing thought by the closing bell.

Only a short time ago, things were looking much better for the futures market.  DuPont (DD) pulled a Caterpillar and put up some big numbers and encouraging guidance that defied the recession talk. 

That had the S&P futures up as many as seven points, but they have subsequently relinquished those gains on the back of an earnings miss and disappointing guidance from 3M (MMM).  The headline that really took the wind out of the futures market, though, was a Reuters report that Germany does not accept language in an EU conclusion draft that allows for continued non-standard measures by the ECB.

It appears, therefore, that EU issues are again taking precedence for participants who are anxiously awaiting clear-cut resolutions tomorrow that will open a new chapter in the market's read on the European debt crisis.  The S&P futures are now down five points and are trading 0.6% below fair value.

With the S&P 500 up 14% in the last three weeks, the benefit of the doubt is clearly being given to the idea that a worst-case scenario in Europe will be avoided.  At the same time, it has to be argued that the benefit of the doubt is also being given to the idea that the third quarter sales and earnings results are showing that the world functioned much better in the third quarter than was reported.

Netflix (NFLX), on the other hand, has had a major operational malfunction.  Although Netflix topped the Capital IQ consensus earnings estimate for the September quarter by $0.22, it issued fourth quarter guidance well below the current consensus estimate.  Consequently, investors are streaming out of the stock, which is trading 35% lower in premarket action.

Netflix will be a story stock throughout the day.  The overall story for the market from an earnings perspective, however, is that things are not as bad as had been feared and that is exposing some attractive relative value opportunities for long-term investors.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service.  To request a free trial, please email researchsales@briefing.com.