Will the ECB Drag the Market Lower

The market continued its sideways move yesterday and banged-up against 1335 resistance for most of the session. Over the past four sessions the market has been stuck in a four point range and trading on less than average volume.

  Activity picked up a little more yesterday, but by the end of the day volume was still below normal levels. Although yesterday was a huge day in the forex market, and the dollar was murdered. Most of the dollar's demise can be attributed to the euro, which soared yesterday ahead of this morning's ECB rate announcement.

  It was widely believed that the European Central Bank would raise rates (this is opposite of what Ben Bernanke recommended) to fight overwhelming inflation. Indeed, the ECB raised rates by 0.25% to 1.25% from a record low of one percent.

  The ECB is in a similar spot to the U.S. where inflation due to rising commodity price needs to be weighted carefully against weak parts of the economy, for example Spain or Greece, and Louisiana or Nevada. Higher rates translate to higher financing costs, but lower rates ignite inflation. It's a difficult trapeze act to be sure, but in my view the ECB did the right thing this morning and Ben Bernanke is very wrong with regard to his free money tactic.

  Although the ECB raised rates, it was only by a small amount. And rates are still near record low levels. But the fact that rates rose for the first time in years sent a message to the market that low interest rates are not permanent. The market clearly expected the ECB to raise rates, and may have actually priced in a larger increase since the euro is trading lower this morning.

So what does all this gibber jabber have to do with trading this week – probably not much. The increase was expected, so the market reaction should be mild as most of the increase is built into current prices. The euro is also over heated and up against a fairly strong level of resistance, so a short term increase from here appears less likely. If I had to pick a direction, I would say today's announcement will be mildly negative for commodities since the dollar should increase slightly in the near term. Over time rate increases will impact the stock market and our trades, but it appears unlikely to happen today.

 As I have mentioned each day this week, everyone is gearing up for earnings season next week. Also, SPX has still yet to take out key resistance despite four days of consolidation between 1330 and 1339. Even though SPX has risen for the past four weeks, there is currently a large amount of indecision. And I am not ruling out a blow-off top next week where stocks gap higher after Alcoa AA and fall dramatically after IBM IBM.

 TradeMaster went long one new position yesterday in Red Hat RHT playing a bounce off $45 support. RHT broke out past $40 resistance and motored up to multiple year highs only a few sessions ago. Shares have pulled back down to the gap up near $45 where TradeMaster entered and I expect them to find support. The stock will move sideways to lower if the market falls apart, but if the market continues its sideways move, this stock should challenge new highs up and around $49. No stop for now, but I suspect $44.50 (-1%) will hold firm, at least this week.

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