What's Propping Stocks Up?

NEW YORK (TheStreet) -- Whether it's the product of lingering euphoria from last week's seeming progress by the eurocrats or just a function of this being a truncated trading week, the major U.S. equity indices have held up surprisingly well in the wake of Monday's poor read on the health of the manufacturing sector

The Institute for Supply Management reported that manufacturing activity as measured by its purchasing managers index fell 3.8 percentage points on a sequential basis to 49.7% in June, the first contraction since July 2009. New orders were especially weak, losing 12.2 percentage points to 47.8%, contracting for the first time since April 2009.

But instead of freaking out and selling off, the Dow Jones Industrial Average is up 60-plus points so far this week and both the S&P 500 and Nasdaq have kept the flame of Friday's rally alive by starting the week with consecutive gains.

Research firm Capital Economics weighed in on what's keeping the risk-on trade afloat in the face of what's a truly ugly piece of data that it says is indicative of U.S. gross domestic product growth of just 1% vs. the current consensus of around 2.5% for 2012.

"[T]he markets appear to have taken comfort from two sources," wrote analyst Julian Jessop in commentary released Tuesday. "One is the idea that the June ISM may already be 'old news.' It is possible that June's gloom will soon be overtaken by the relief at the outcome of the EU Summit at the end of last month, and by a policy-induced rebound in China. The ECB and the Bank of England are also both expected to loosen monetary policy further on Thursday."

Jessop isn't buying this logic though, calling it a "flimsy basis" for stocks being so resilient over the past two sessions because in his view all the eurozone leaders really did is kick the can down the road once again.

"While the Summit tackled several implementation issues that could undermine the effectiveness of other bailout measures, little of substance was actually agreed and the fundamental problems threatening the survival of the euro remain as large as ever," he wrote. "Indeed, the limited progress made at the EU summit may already be unraveling."

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