Market Trader: "Downside Potential From Current Levels."

Not surprisingly, market technicians who were bullish two weeks ago are in a state of despair. Talk about minor support at 1,350 for the S&P 500 is half-hearted at best; the truth is that other than the March closing bottom of 1,273 there is no one willing to draw many lines in the sand here.

In emails over the weekend, several traders noted that both the Martin Luther King Day and St. Patrick's Day bottoms were accompanied by 75 basis point eases from the FOMC, but those bullets have now been used. "The market is now left to its own devices to create its next low," one trader wrote. "Since future prospects for the economy remain dismal, there is considerable downside potential from current levels."

Moreover, it is important to note that Friday was a horrific day for large macro hedge funds, thanks largely to comments made by the ECB's Tichet.

Recall that Mr. Trichet signalled that rates may rise in Europe; at the same time, the poor U.S. employment report indicated that rates in the U.S. were not going to rise due to the weak economic outlook.

Mr. Trichet's comments were the main event, and his comments were the main topic of traders over the weekend. Here's why: many macro funds were set up for what is called the "convergence trade"--i.e. that rates in the U.S. and Europe would come closer together. Everyone was set up for that to happen--specifically, for the U.S. to raise rates, and the ECB to cut rates. That trade required traders to be long European bonds, and short U.S. Treasuries, and generally find some way to be long the dollar.

However, Trichet through a bucket of cold water on that trade--and in addition was largely responsible for that big rise in oil. Why? Because many traders went long the dollar by being short commodities, specifically oil. If you no longer believe that the dollar will rise, you have to cover that short in oil. Voila. Big oil rise.

The big hope is demand destruction in oil. Malaysia has now jointed Indonesia and Taiwan in dramatically reducing subsidies for oil. In Malaysia's case, this is resulting in a 40 percent rise in fuel, which was announced last week. The big question is whether China will end subsidies after the Olympics, but as Vince Farrell noted, they have a budget surplus--and they are unlikely to change those subsidies dramatically.

Elsewhere:

1) Big insurance deal this morning: Willis Group , the third largest insurance brokerage firm in the world, is buying Hilb Rogal & Hobbs , for $1.7 b, in a cash and stock deal valued at $46 a share. Since Hilb went out at $30.89 on Friday, that is a more than 40 percent premium.

2) Lehman lost $2.8 b loss ($5.14 a share loss) and is expected to raise $6 b in capital. There convertible offering, according to our David Faber, expected to carry an 8.75 percent coupon; the common stock will be offered at $28 a share.

3) McDonalds out with strong same store sales in both the U.S. and internationally; up 4 percent pre-open.

4) UBS was briefly halted in Europe to investigate a mistrade; it has resumed trading, now down about 4 percent, near a 5-year low. There has been plenty of talk of further asset markdowns in the second quarter.

5) CIT up 10 percent on a $3 b financing deal, provided by Goldman Sachs.

6) New Zealand and Australia, Hong Kong and Shanghai markets are closed.

7) Expect more of this in the coming days: JP Morgan is lowering 2008 earnings estimates on the S&P 500 (from $90 to $89) to reflect the higher cost of oil, with particular hits to auto and airline earnings. That hit is offset somewhat by slightly higher earnings for energy. Despite the downward revision, they remain upbeat on stocks: "We still stay long equities even with oil headwinds...The US Economy has demonstrated impressive resilience despite these headwinds, with modest job losses, and moreover, JPM's Economics raised their 2Q GDP forecast to 1.0% from 0.50% previously."


Questions? Comments? tradertalk@cnbc.com