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S&P 500 Set to Hit 4-Year Highs; Panic in Hedge Fund Land

The rally continues. The S&P 500 index will open near a four-year intraday high; the U.S. dollar index at a seven-week low; gold near 3.5 month high; and the euro at a seven-week high vs. the dollar.

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The better tone is sticking. There's little doubt about the source of this rally: Since Aug. 2, when the (explain this) met, the S&P 500 is up nearly 4 percent.

Since that meeting, Spanish 10-year yields (explain this) are at 2.5 month lows. Spanish stocks are up 10.7 percent since Aug. 2; Italy up 9.1 percent; France up 5.4 percent, Germany up 4.5 percent. Even Brazil is up 5.3 percent. (Read More: Spain Debt Costs Drop as Markets Bet on ECB Action.)

My point: The market is rallying in anticipation of big policy measures from Europe. What kind of measures?

Der Spiegel, over the weekend, said the ECB was laying plans to set yield targets on the bonds of euro zone countries. If rates went beyond the targets, the ECB would begin buying the debt.

Last night, London's Daily Telegraph said that Jorg Asmussen, the German member on the ECB board, is also endorsing the plan, despite the opposition of the Bundesbank.

How much debt might the ECB buy? Asmussen confirmed that purchases may be "unlimited."

And what about the opposition of the Bundesbank, which has argued that any such buying would contravene treaty limitations on buying sovereign debt (explain this)? Those limitations can apparently be surmounted, providing the ECB can argue that they are acting to prevent a breakup of the euro — known as "convertibility risk."

The key, of course, is Spain. It will need to make a formal request for aid. There is a monthly Spanish cabinet meeting this Friday, that's when we will likely hear something.

Elsewhere:

1) Panic in hedge fund land: Massive underperformance argues for chasing returns. The S&P 500 is up 14 percent this year. How many hedge funds are up 14 percent this year? Not many. According to BarclayHedge, only 81 out of 736 long/short equity hedge funds they track were beating the S&P 500 as of the end of July.

That's 11 percent. As we roll into September, that kind of stat will begin to evoke mild panic in hedge fund land. (Read More: Dumb Money—Hedge Funds Can’t Even Beat Bond Funds.)

2) Watch for breakouts: It's happening in banks. Bank of America is at $8.22, its highest level since May. Citigroup is over $30, a three-month high.

—By CNBC’s Bob Pisani

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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