A Week of Weakness. Digesting the Current State of the Market

I haven't had much of a chance to trade the markets this past week so I'd like to update my current view on the action. I was overall bullish to begin the week and in favor of buying the dips. So far however, the market has been making lower lows with the ES down as much as 47 points off Monday's high. That low showed signs of capitulation as we saw a reversal on heavy volume that moved the ES back up 25+ points or a 50% retracement to Monday's high. The fact that those gains were not held gives me some concern, but in reality, today's close is just high enough to leave room for optimism going forward. I remain bullish overall though there is certainly a possibility to see another lower low on the ES. This latest down move could be an indication of a period of larger swings both up and down over the coming months. We may not see persistent grinds upward like we have become used to since the market lows in 2009.

Reasons for the sell-off this past week:

Poor ADP Jobs numbers and jobless claims ahead of Friday's employment report. New jobless claims came in well above expectations on Thursday and the ADP report suggested that job growth was slowing. The negative implications of those numbers is now priced into the markets. The employment Situation released today showed some signs of strength as April job growth showed the highest monthly increase in payrolls since the "recession ended" with 268,000 jobs added versus estimates of 200,000. On the downside, the unemployment rate increased back up to 9.0% from 8.8% in March.

Margin hikes in silver have limited the inflow of purchasing power to the already over-extended (arguably parabolic) move in silver. Silver has since collapsed more than 27% and taken Gold, as well as the entire commodity sector down with it. With the dollar approaching the lows of 2008, this gave an opportunity for capital to flow from commodities into the currency markets (which have very low margin requirements by the way). The US dollar benefited from this capital flow and helped fuel the bearishness in US equities.

Ultimately though the dollar is still looked at as a weak currency. While I believe the dollar will see a significant rebound at some point this year and equities will likely turn down when that happens, I think the process will take some time to play out. I believe the dollar will go on to make another lower low before seeing a larger move to the upside. So with a weak outlook on the dollar and continued easy monetary policy in the US, I see another move higher in equities. I expect the S&P 500 to pass 1400 this year and will become more cautious once that happens. Hence, I continue to be bullish overall amidst the current down-turn.