Groundhog Day & ECB's Trichet Sends Dollar back to its Bedroom

Here we are at the exact same spot we were Monday - we just had 3 days of down to start the week, (always ending in a spike in the last half hour of the day, out of the blue to keep us over key technical levels), and then a blessed rally yesterday on the "great retail numbers" and "great unemployment numbers", yet here we are, at exact same spot we were to start the week. [S&P 500 at Bottom of its Range]

Anyhow, as we discussed in the weekly round up, we were in the middle of no man's land to enter the week; with a very tight range of 3.5% (1430 on upside, 1380 on downside). Well in just a few short hours we've come down to test the bottom of this range.

I'm doing the exact same thing I did earlier this week - that is lighten up the short exposure as we hit the bottom of the range. Then the game plan is to buy that short exposure back on (a) a rally or (b) a break down below say S&P 1373-1375 indicating a true break of support. We've been so close every day this week (except yesterday) One day, we'll break through this range on the bottom and the invisible hand won't be doing futures buying in the last 30 minutes to create an illusion of a rebound that every computer program across hedge fund land follows through with real buying (we saw that Monday, Tuesday and Wednesday) this week.

But for now I must assume the invisible hand will be doing its magic trick again late in the day and bring the S&P back to support and create a bounce and save the day. We shall see; if I am wrong and the market falls off a cliff late this afternoon I'll be adding back some short exposure that I sold off in quite large dose this AM. We are very range bound and sooner or later we are going to break strongly one way or the other (all economic sense and logic would dictate down but the market has nothing to do with sense or logic)



Further, the calls for "2nd half recovery" are looking more silly by the moment (again readers, let me know when your favorite pundit cries uncle and switches to "1st half 2009" recovery!). As are the calls for the "stronger dollar". Yesterday Trichet [May 24: Trichet Says "Shocks" are Not Over for Economy] shocked the world (pole axing the dollar and spiking oil) by indicating he might be RAISING interest rates in Europe as soon as next month.

• Trichet yesterday said the ECB may raise interest rates as soon as next month, two days after Federal Reserve Chairman Ben S. Bernanke indicated he's finished cutting for now. A near doubling in the price of oil in a year and record food costs are forcing central bankers to look beyond weaker consumer spending and focus more on restraining inflation expectations.

Frankly that surprised me. Now remember, CNBC and all the pundits have been making the "strong dollar" case on this thesis - as Europe follows the US into weakness, their central bank will be forced to cut rates (which will stoke inflation and kill their lower and middle class as well), and not due to any strength in the USA, but simply in RELATION to the lower rates in Europe will the US dollar REBOUND. Woo Hoo. Sounds great on paper (or TV) but I've been posting that this is a bunch of nonsense. But I simply thought the European Central Bank would hold rates steady since they actually give a damn about inflation. I did not think (nor did anyone judging by the crazy reactions yesterday) that the ECB would have the gall to RAISE rates when the Euro zone is clearly heading for a major slowdown. That is textbook Paul Volcker action. And it kind of ruins the whole "The US dollar will strengthen, not do to anything good happening in the US but because Europe will cut rates" theory. Oil is responding in kind screaming up $6 yesterday and another $7 today. More staycations! Book your room soon! (oops, nevermind - your room is your bedroom)

I know economics is boring to most but folks, this is fascinating stuff. I am trying to explain it in "easy to understand" language so the non financial readers of the blog get what is going on in this worldwide drama. There are so many moving parts and things are so global in nature versus even 10 years ago, so it's a kaleidoscope out there. I am getting the most enjoyment out of these stuffy pundits getting knocked on their rear ends by all their wrong predictions! :) But they're stubborn I'll tell you - until the writing on the wall - jump off said wall - and smacks them in the face for a few months straight - only then *might* they say... "oops". But even then, I doubt it.

We'll continue reporting the reality; or at least my very biased version of it ;)