Remember never forget the power of greed and fear, and the propensity for investors wanting to own stocks (taking long-side) and fund managers chasing performance as we saw today especially if they think the bull-train is pulling away they will want to hop on board.  Please, remember when in doubt as to market conditions/direction CASH is always king (or queen depending on your gender J ) please trade cautiously and be quick to protect your profits. I’m guessing that this the days ahead we will become embroiled in a major bull-bear battle as we head into the end of the second quarter.  This is options expiration week, so we need to expect the unexpected… as we could see some early rotation out of and into new positions, on we could see a doubling down! I would be very cautious about new positions (as the whipsawing could be extreme this week) so I would only look to buy strong support and sell significant OHR as the volatility is likely to continue until traders become immune to the daily news from Europe.  This Friday is a quadruple witching expiration and much of the volatility this past week could have been related to option position squaring after a month in a very serious down trend; as I stated this past week normally the volatility is experienced the week before quad expiration but there could still be plenty left for the week ahead.

There are several major economic reports on the calendar this week that could move the markets the NAHB Housing Market Index on Monday should give us an idea how badly the housing market dropped when the taxpayer bailout/giveaway credits expired; we saw that Nevada Senator Harry Reid who is facing a tough reelection campaign said on Friday he will introduce a bill next week to extend the tax credit closure period through September. This is aimed at people who are having trouble getting their loans closed because banks are dragging their feet on short sales and lending money at what they perceive to be discounted rates that will soon reverse. Right now speculation abounds as it is yet unknown what criteria he will put closing with his so called bill and or if he will attempt to reopen the taxpayer give away process again for new purchases. You can bet other senators whose states are suffering big time due to the down turn in housing facing tough elections will want to jump on board, and the positive bias that could come with another revision to the homebuyer tax credit give away.

Later in the week we get another look at the Producer Price Index and Consumer Price Index and the Fed will likely be looking for signs deflation within the reports instead of inflation. The CPI is expected to decline another 0.2% and be right on the verge of a deflationary trend, while the producer price index is expected to decline by 0.5%.  These reports are a primary reason the B-52-man "Bernanke" and his ECB counterpart Trichet have been able to confirm that interest rates are going to remain near zero for a very prolong period of time **creating yet another mega bubble**

One of the more frequent questions being asked of me in recent days is whether the weakness in the markets that we have experienced in April-June is merely a correction, or whether it's the start of another bear market leg down. I believe it’s a correction, within the secular bear-market of the March-2009 bottom to the 2010 April high!  Right now I'm looking at the near-term trends 10-20 trading days and it's better I believe to ponder what trading or investment strategies we need to adopt within these present circumstances, rather than waste time trying to determine the longer term trends as the volatility is extreme during these periods of uncertainty as such trend trading is far more difficult to peg as stops are readily run and taken out! So often by the time the various indexes and/or stocks and other asset classes have dropped 20% thus meeting the classic definition of a bear market, investor's portfolios would already be beaten down considerable, which is why many investors that succumb to FEAR tend to sell at bottoms.

Volatility has increased significantly in recent weeks, due to the uncertainties created by Europe's debt crises but also because of growing skepticism over our so called economic recovery. The weighted average of various implied volatiles on various SPX options known as the VIX Index on Friday closed at 28.79 which even though is 33% down from a month ago high (48.20) it is still twice where it was just a few months ago; before the Euro debt debacle started (on 4-15-2010 it was trading at 15.50+/-). The VIX which is sometimes referred to as the fear index encompasses the options market's best guess of what the future might hold. Currently when looking at the VIX we have a golden crossover a near-term bearish development for the markets otherwise there's no clear direction for either the bulls or bears to latch on to….see VIX section below!

Currently the various indexes and many stocks after this past week's rebound sit at the precipice…or they could be at the beginning of a multi-weeks bullish reversal; we have some conditions that are ripe for a potential water-shed plunge like Wiley Coyote off a cliff….now please do not infer from these comments that this scenario means there will be a crash starting over the next few day/weeks, so please I caution you not to go out and place short-orders-trades with reckless abandon. What the charts are telling me and the action of the tape is that there is a growing risk of one occurring and the probability is higher than normal, as from my experience and extensive research we have more than a couple conditions in existence that have developed prior to stock market crashes in the past that exist currently…the internals since the April top have been and still are deteriorating; and crashes are born out or divergent moves off of significantly deteriorating technicals (meaning that crashes usually happen after lackluster volume parabolic moves). Sentiment has been significantly damaged, and its not easily repaired! **There is a 35-45% probability (unless we see some intervention of a looming market crash, and the probability is increasing each day...I like to observe a phenomenon called my 90% panic volume indicator...basically it shows true supply/demand, fear (90% down days) and euphoria (90% up days)...and since the turn in and around April 16th there have been (9) 90% down-days and (4) 90% up-days, so we have been seeing some massive panic in the markets; and I have not seen since I started seriously trading (1999) this type of action! This type of action is showing not only massive price swings and divergences, but extreme volatility, and the better than 2:1 ratio of selling panic days (on heavy volume) to buying panic days on moderate volume are forecasting a crash type near-term capitulation scenario....so please be very careful!   This is why I believe this heaving selling and panic selling is setting up for more than a healthy correction as is hyped daily on the bubblevision networks...the trend is our friend right now and when we see the formation of lower highs and lower lows on significantly heavier volume than the interspaced relief rallies, we have strong established down-trend ! (I will expound on my directional bias, next weekend when I have more time!)

Remember my premise of late, when the markets (especially the large players those mega prop-trading desks of the various to big-to-fail banks, those that stand to benefit the most from their positional hedges and options/derivatives which have turned semi-bullish this past week) want to take the indexes and stocks down or up they will always find an excuse to hit the sell-buttons or execute the sell-programs or vice versa start a short squeeze by implementing a GAP and run! The markets right now have been embroiled in a distinct bearish trend; and until the past 2-weeks (again the reversal on Tuesday and run into Friday) had not been able to post two consecutive daily gains since late April. Every bearish news item crossing the headlines no matter how slight has turned into the bearish-main-course of the day, and the bears had been gorging themselves, and we are in this bear market turn-down until really we see that this dismal news is ignored (this week may be the test of that premise) and the bulls step up and start to buy despite the contagions on sustained volume! Unfortunately for bulls the bad news is likely to get far worse before it reverses this awful tonality; as evidence is growing from multiple economic releases that have started to show that our economy is weakening.

The economic reports released on Friday were mixed once again; as retail sales for May plunged 1.2% after posting a 0.6% increase in April, we saw that sales fell sharply at building materials stores (9.3%) and at motor vehicles and parts stores as they dropped (1.7%) strangely gasoline stations experienced a (3.3% plunge as driving demand waned). The furniture sector was the only real gainer strangely with a 1.0% move. This was the first decline in total sales since September; and the decline in the headline number was driven by that big decline in building materials; and this decline in building materials was likely due to the April 30th deadline for the homebuyer tax credit; as sellers raced to make last minute beautifications…this in my opinion is an ominous path/trend as the decline in all sectors pretty much confirms a lower trend/forecast for the next couple months especially for the housing sector. Sales in early Q2 were very strong heading into that this housing taxpayer give away deadline and there is nothing on the horizon to boost home sales or retail sales again until the back to school surge starts. Until jobs start to be created in earnest the onslaught of continued job losses will weigh on retail sales. We saw this past week that initial claims remain stubbornly high as they refuse to give way, as we saw 456,000 new claims were files last week; and they seem to have plat plateau at this level (range 450-474,000) and this is a very high range not a signal of a strengthening economy with real job creation as we need to see those claims drop to about 250,000 per week for the job market to stabilize and reverse.  

It was very strange for me to see on Friday that despite deteriorating economic conditions and significant unemployment the first reading of Consumer Sentiment for June increased to 75.5 and the highest level since January 2008…this left me scratching my head as the present conditions and expectations components both rose 1.9 points; I found it strange that sentiment is slowly crawling higher (some of the positive expectations could be due to the drop in gasoline prices) as gasoline prices are not going up as they normally do this time of year.  

The Weekly Leading Index ECRI….has plunged; this is a measure of future U.S. economic growth and it has plunged to a 44-week low in the past week, indicating that the economy is about to reverse the recent growth due to inventory expansion as growth is slowing.  The Economic Cycle Research Institute, a New York-based independent forecasting group, stated on Friday that their Weekly Leading Index dropped to 123.2 for the week ended June 4, down from 124.0 in the prior week this was the lowest reading since the week of July 31, 2009, when it stood at 122.4. Meanwhile, the index's annualized growth rate dropped to a negative 3.5% after a rise of 0.3% the prior week. This was the first week that we dropped into negative territory since June 2009; and this was the fifth weekly decline in this index in a row, and nine of the past ten weeks were declines a very foretelling trend of weakness ahead. This continued weakness in the Weekly Leading Indicators clearly suggests the recovery that is so eloquently hyped on the various bubblevision networks is in some serious trouble. The inventory replenishment cycle which was primarily responsible for more than 50-60% of the GDP gains in the prior quarters, is almost over in my opinion and that replenishment cycle will likely start to slow to a less than normal trend. The main drag on the leading indicators has clearly been jobs or the lack thereof….despite the hype estimates for the June jobs report to be released in a few weeks have been reduced dramatically and the numbers are dropping quickly as they now are coming in around a loss of 200,000 jobs; I believe this is going to be when the markets get a huge surprise to the upside as this will be the start of what I believe will be a nice wave of positive reports that the democrats will engineer into the elections in order to be able to stand on their soap-boxes and state that their policies are working at putting Americans back to work in my opinion!

Last Friday we saw a dismal jobs report….as our economy (US) added a mere 431,000 jobs in May; still it was the most since 2000 as the bubblevision networks proclaimed but the numbers were distinctly boosted by 411,000 temporary government census jobs; and worse yet the ever mystical, fuzzy math operator called the birth death model added in a whopping 215,000 additional jobs. The unemployment rate slipped from 9.9% to 9.7% but this was due to fuzzy math computations. The street had expected a much stronger gain of 540-570,000 (and the whisper numbers were running around 650-680,000) and as I stated in my report late on Thursday….the best was priced into this release [and that the stage was set for a sell the news-release] and that any negative variance and we should expect that the market participants would trigger the sell-buttons in a significant manner and that we would likely reverse all of Wednesday's euphoric short squeeze rally. The estimates for the payroll numbers were being revised higher right up until the numbers were released; and we saw the surprise as even Goldman Sachs revised their estimates to 625,000 late last week. President Obama and Vice President Bidden were bragging in televised blips about the strong jobs growth expected in May; obviously all the talking-head punch was spiked.

The report showed that the private sector gained only 41,000 jobs, compared to last month’s weird surprise wherein they stated a 218,000 gain.  So at first blush it appears that April's NFP (non-farm payroll) gains were a head fake and that the true trend is lies closer to the May number, (as seasonally hiring should be increasing). After 24 months of job losses, the US economy has gained jobs in six of the past seven months, but the rate is anemic compared with the rate of job destruction.

Construction employment, which had jumped by 26,000 in April, resumed its declines in May, as the industry lost 35,000 jobs (whipping out all of April's gains) during a period when construction should be starting to reverse during the spring/summer months. The drop-off could have been exacerbated by the end of taxpayer giveaway program called the homebuyer tax credit. What disturbs me greatly is that since last May (this is when Cramer and others shouted at the top of their voice that the bottom was in for housing and commercial real estate was in the construction sector construction (where many good paying jobs reside) has lost more than 515,000 jobs.

The report was disheartening even more as the average length of unemployment rose again in May, from 33.0 weeks in April to 34.4 weeks, indicating the vast difficulties people who worked in industries particularly hard hit by the economic crisis (construction, real estate, manufacturing) are having in finding new jobs.

This past Wednesday, we heard from the B-52 man as he testified before congress wherein he warned, "The federal budget appears to be on an unsustainable path." Then, he said we can't cut spending just yet because the economy's still fragile (I though he previously stated we are growing significantly). He seems to be very perplexed by the economy, particularly gold prices. He said inflation-indexed bonds (mostly a government contrivance) and commodity prices forecast low or no significant inflation; then he went on to state that "Gold is out there doing something different from the rest of the commodity group." At least he admitted he doesn't fully understand the movements in the gold. He further stated that "I do think there's a great deal of uncertainty and anxiety in financial markets right now. And some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point."  The B-52 man uttered nothing about his own culpability and incompetence; as he and his fearsome inflation fighting warriors at the Fed were and are responsible for the last sever mega bubbles and the resulting contagions and crisis!

Federal Reserve board chairman Ben Bernanke said this week that he didn't think that the U.S. economy would slip back in to recession (then again he stated before the fall of Bear and Leman that those contagions and the sub-prime debacle were slight and manageable), saying that consumer spending and business investment seem strong enough to keep the economy growing, albeit at a relatively subdued rate (hell this guy and Greenspam have never seen a recessions brewing (they are the primary contributors)  before it was reality, they give economists a bad name). "My best guess is we'll have a continued recovery [but] it won't feel terrific," he said (I bet this make all of those 25-million Americans out of work feel great….Oh I almost forgot one of Bernanke's primary mission is to ensure full employment (He's doing a great job there right?).

Fears of a double-dip recession have greatly increased in recent weeks; especially after the weak May employment report released last Friday, which showed just 41,000 private-sector jobs were created last month, (most so called experts expected 250,000, and the numbers were terrible, despite the addition of 215,000 mythical jobs created through the birth-death fuzzy-math model….hell we need 135,000-150,000 new jobs to be created just to keep pace with population growth) as last week's numbers were the latest signal that the U.S. economy may be significantly softer than expected (I expect we see some miracle job creation ahead of the fall elections though).

Total nonfarm payroll employment grew by 431,000 in May, reflecting the hiring of 411,000 temporary employees to work on Census 2010. Total private employment showed little change over the month (+41,000), following increases in March and April.

·        In May, manufacturing employment increased by 29,000 over the month. Factory employment has risen by 126,000 over the past 5 months. Within manufacturing, both fabricated metals and machinery added jobs in May.

·        Temporary help services added 31,000 jobs over the month; employment in the industry has risen by 362,000 since September 2009.

·        Employment in mining continued to increase in May, with a gain of 10,000. Support activities for mining accounted for 8,000 of the over-the-month increase. Since October 2009, mining employment has expanded by 50,000.

·        In May, employment in construction declined by 35,000, largely offsetting gains in the industry in the prior 2 months. May's job loss was spread throughout the sector.

·    All Equity funds report net outflows totaling -$1.874 billion as Domestic Equity funds report net outflows of -$1.578 billion and Non-Domestic Equity funds report net outflows of -$0.296 billion...  The rate of outflows to Non-Domestic funds is $1.180 billion/week, as measured over four weeks…   

·    ExETFs….Emerging Markets Equity funds report net inflows of $0.107 billion as some investors become less risk averse as they take advantage of a bottoming euro/dollar relationship and expected exports to US consumers.

Volatility is the major play of the past few weeks…..As almost every trading day for the past 5 weeks, the SPX-500 has made at least a 1.0% intraday move. It's very apparent that we're in a situation now where the VIX (the so called fear indicator) has been battered about with some massive swings (20.43% move up on Friday alone) to close at 35.48 right in the middle of the recent high/low range….well off the 5-26-2010 lows of [24.10]; and well off the 5-21-2010 highs [48.20]  With a rising VIX, and some serious technical damage the SPX-500, Dow and now the Nasdog all trading below their 200dsma; the horizon is littered with red-flags (sell-signals) for a lot of technicians and fund managers and hedge fund managers, as many will actually act on the loose of these critical levels especially if all 3-indexes drop below the 200dsma! 

As a technician we are always watching for what we call a broad bullish pattern called the "golden cross" this occurs when the rising 50sma of the underlying (asset, stock etc.) moves up above the rising 200sma. Conversely when the opposite happens on the downside, I like to call it the "kiss of death cross" the $64,000 is whether this technical pattern have any meaning as it applies to an indicator or statistic-indicator, like, the VIX (as the VIX is an optional indicator hence bets are being laid out daily on this sentiment indicator)!

Please remember that if you believe there is a correlation and it's indeed bullish for the VIX, then it's bearish for the market due to the inverse relationship. Like the golden-VIX-cross during the Bear-Sterns debacle (we have to ask whether the PIGS/Greece is the new Bear-Sterns); we saw a dismal pattern, as the last time we saw a golden cross on the VIX it took place on 9/17/2008, after which the market imploded 18.66% over the next month, and 21.79% over the next 3-months **(so please watch this indicator very closely as this could be a preemptive signal for potential mega weakness on the SPX-500).

However unlike an equity or other asset; it does not for the most-part (except for its option activity) have the same supply and demand characteristics as it doesn't directly trade, it simply calculates sentiment via option activity, but I still believe this trend bears watching closely!.

As I had previously forecasted The U.S. dollar has been embroiled in a very decent relief rally these past weeks/months as it has been enjoying a respite from its declining trend over the past several years, as evident on the dollar index charts below, it bounced from the 74.24 level as I had forecasted it would.  I'm expecting another bullish run in the near-term....back up to $87.85-88.50 (which is exactly what we saw this past week)  before the next leg down starts...(ands we are very close to this level) however if they break out the greenback out above $88.95 its clear sailing to $90.85....we lost 0.90 points on the week....or 1.02% ....nevertheless we are still in a bull-confirmed mode on the dollar however this bullish  rally is getting tired a reversal here is just days/hours away....a reversal will help put a floor under commodities and their respective sectors, and this would help buoy the stock market as well, and this premise (technical assessment)  they support...I have written during the past several weeks that we must remain very diligent and watchful of this dollar index as its very overextended due to geopolitical tensions and debt issues!.

The bottom line is the Dollar has broken out above the 38.2% retracement on the daily chart (see below) from within of its own bear market on 2 separate occasions. As I previously wrote when it breaks through the $81.69 (as it had done as I had forecasted it would ) it could easily make a run for $86.20 level (we hit this level this past week) if the rally keeps on due to the weakness in the  Euro and Euro-zone then $88.06 is the next level of OHR (we topped at 88.71 this past week) and then the probability shifts to an anticipated longer term target of the 38.2% retracement from the 120.24 highs to the 71.75 lows  which was the 2008 lows) thereafter the 32.8% retracement comes into play at 90.27 (where I would reverse into a SHORT-position)  then we could easily retrace the move back to $80.75-81.25 in my opinion!.