Nobody's worried? Complacency sets in

The S&P 500 is off to a hot start in 2012 even though worries about Europe, China and banks remain.

NEW YORK (CNNMoney) -- The world's second largest economy is slowing, earnings from big banks have been a disappointment and the debt woes of a continent whose name rhymes with Pleurope are still unresolved. Time for the market to rally? Sure. Why not!

Stocks enjoyed a nice pop Tuesday as investors decided to accentuate the positives. China's gross domestic product starting to cool? It's still better than expected! Lackluster results from JPMorgan Chase (JPM, Fortune 500) and Citigroup (C, Fortune 500)? It's mostly due to poor investment banking and trading activity. That was also not a surprise.

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And Europe? Everyone on Earth (and probably other planets and galaxies) knew that Standard & Poor's would eventually downgrade France. Heck, that was so painfully telegraphed that S&P erroneously jumped the gun two months early.

Bill Stone, chief investment strategist with PNC Asset Management Group in Philadelphia, said there is legitimate reason for guarded optimism.

He pointed out that China's GDP could be a sign that the country will in fact experience a so-called soft landing for its economy.

Stone added that Europe has taken some concrete steps to combat the possibility of a debt contagion, noting that recent bond auctions in Germany, Spain, Italy and France have been well-received.

"Things are at least stabilizing in Europe. The ECB and other European policy makers seem to have removed liquidity worries that had driven yields up previously," he said.

Europe can't catch a break

Still, even though much of the bad (or not fantastic) news was widely anticipated, you have to wonder if investors aren't getting just a little too complacent.

I tend to worry when "less bad" is the excuse to rally. Shouldn't we be nervous when things are merely not awful and actually celebrate when conditions are once again good?

"The tendency to shrug off bad news may be a sign of over-optimism given the worries we face," said Bruce McCain, chief investment strategist with Key Private Bank in Cleveland.

"This could be an ugly earnings cycle and we really need to see more positive developments in Europe. Fundamentals suggest this is a time to be more cautious," McCain added.

The anemic trading volume so far this year may be a warning sign too. It was one thing to have low levels of trading during the holidays in late December and the first week of January. But it's now January 17. People are back to work. We're running out of excuses for the lack of volume.

"The fact that volume is light is important and that should not be overlooked. It suggests there is a lack of belief about the rally. There still is a lot of skepticism," said David Joy, chief market strategist with Ameriprise Financial in Minneapolis.

U.S. exporters hit by global slowdown

This does not mean that the market is due for a huge pullback. But investors just need to be more cautious. Stone conceded that while he's bullish, it would be a mistake to completely ignore the risks facing the global economy -- especially since investors spent so much of 2011 worrying about them.

"Is this another head fake and bad news will start to pile up again?" Stone wondered.

A lot of that will depend on whether the banks can get back on track. Joy said there is a bit of a disconnect between how well the market has been doing this year and the poor results from big banks.

"Can the markets really do well if the banking sector is not doing well? It would be nice to see more strength there," Joy said.

Ultimately though, it all comes down to Europe. If leaders can continue to act more decisively to resolve the debt crisis, that should bode well for stocks. China's slowdown is likely to be less dramatic if its biggest trading partner can nurse its wounds. And the big banks will have less to fear as well.

Unfortunately, it's probably way too soon for Nicolas Sarkozy, Angela Merkel, Mario Monti or any other European leader to declare a Mission Accomplished moment for the continent.

"Europe is not out of the woods. A good debt auction or two that is only good in relative terms does not mean that Europe is in good shape," said Wasif Latif, vice president of equity investments with USAA Investments in San Antonio.

Though Italian bond yields may have pulled back from the 7% level that set off alarm bells, they're still uncomfortably high.

"Italian bond yields at about 6.5% are not sustainable. In the end, the math is the math," Latif added.

Best of StockTwits: Christmas was a few weeks ago. I hope that anyone unlucky enough to get coal in their stocking sold it a while back. The pullback in coal stocks and natural gas prices had traders yammering Tuesday.

Contrarius: coal names looking like the cable snapped on the elevator $BTU $ANR $ACI $CNX $PCX

BigSpooky: ancient history, but dont forget that $PCX had a nasty warning on met-coal friday ... $ANR

It's not so ancient that investors have forgotten. Patriot Coal (PCX) said it would cut mining production due to lower demand for some types of coal. The drop in natural gas prices hurts as it makes gas a cheaper alternative to coal at power plants.

TodayTrader: They are going to have to reverse split that piece of UNG called $UNG again.

Ouch. The United States Natural Gas Fund (UNG) did just do a reverse split last March and the price is once again edging back toward $5. I guess reverse splits don't work well for commodities ETFs or bank stocks.

ReformedBroker: One more week like this and Natural Gas will essentially be free, like downloaded music. $UNG

Gaster? BTU Torrent? Anyway, this may be bad news for investors. But as my colleague Steve Hargreaves explains, consumers should be happy.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.