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It’s Time to Fight the Fed: Macke

Fin - Breakout - US

Welcome to Dos Hombres: Largely Humorless Edition.

Matt Nesto kicked the segment off by jamming the Elvis classic Suspicious Minds into my head by way of expressing his belief that the Federal Reserve is "caught in a trap" due to current economic conditions.

After a brief pause I picked up Nesto's beat and elaborated on Ben Bernanke's predicament, a conundrum the Fed Chairman rather atypically confessed to in a speech yesterday. Specifically, the economic data is worse than the Fed thought or hoped it would be at this point. The Fed has maintained an aggressively "accommodative monetary policy stance" for well over two years. Yet the jobs data remain weak and inflation -- or what Dr. Ben calls "global pressures in the commodity market" --  is such that further devaluing of the dollar is dangerous.

"In this context," Bernanke concluded, "monetary policy cannot be a panacea." The Fed Chief hopes gas prices will ease, but until employment data improves we "cannot consider the recovery to be truly established." The Federal Reserve, in other words, is out of time, money and ideas for fixing the economy in the foreseeable future.

The Fed is relying on hope. Hope that hiring picks up, the consumer re-emerges, and U.S. economic growth rises above 3 percent by the end of the year. A 3 percent growth rate would be roughly a double from the 1.8 percent growth rate in the first quarter. For some perspective, the World Bank, a group generally devoid of America's genetic optimism, sees the United States slowing to 2.6 percent in 2011 versus 2.8 percent last year. Regardless of whether you listen to the World Bank or the Fed, economic prospects have dimmed dramatically. Yet equities remain higher in 2011. While not perfectly correlated, slowing growth and rising stocks don't generally coexist. Given a choice between hope for brighter days and actual data, most traders will short hope.

Still jigging to the Elvis in his head, Nesto picked up the beat by running through some stock levels which could offer support should the still-muted sell-off pick up steam. Ten percent down from the May 2nd highs would put stocks at levels last seen in December 2010. That's bearable, but the Big Man got a little scarier from there. Twenty percent down from the May highs, which is when we'd fit the definition of a Bear Market, would take us to S&P 500 at 1,096, about 200 points lower than current levels.

Here are the S&P 500 levels to watch versus the percentage change from the May 2nd high of 1,370:

*S&P 1233 (-10 percent)

*S&P 1137 (-17 percent)

*S&P 1096 (-20 percent) *bear market territory

*S&P 1010 (-26 percent)

A complete wipe-out of the rally which started in July of last year would take us to just over 1,000 on the S&P500. As bearish as this all seems, Nesto and I don't believe the S&P is heading straight for these levels. We're pointing out that it's distinctly possible given the foggy economic environment. Traders are swapping out upside targets for downside support. Nesto and I aren't inventing the stock roll-over; we're reporting on it.

"Don't fight the Fed" is your grandfather's trading strategy. In 2011, with the Federal Reserve out of options, ideas, and ink for the dollar printing press, it's time to flip the script. Roll up your sleeves, grit your teeth and challenge the Fed to a trading cage match. If bears can't beat Bernanke & Company's new policy of "Shrug n' Hope," the American stock market truly is invulnerable.

Are you placing your money on the Fed or the Bears? Let us know with a comment or drop us an email: Breakoutcrew@yahoo.com.