Monday 2nd May - Weekly Recap and Forecast ahead

Another positive week for the equity markets. As I mentioned in my last post, the bulls are back in full control. Last week we had very strong readings from the cumulative ticks even on days the price action seemed neutral to weak (3 days above +60,000 last week). This tells me that the uptrend in equities is intact for now. The quants studies continue to call for higher prices in the intermediate term. Looking at confirmation from other asset classes and we can see that the dollar has broken the previous swing lows and looks to be heading lower. This is driving gold to record highs and oil continues to creep higher as well (more so of a hedge trade then fundamentals I think at this point as inventories continue to come in above forecast). On the monetary policy front, nothing has changed significantly with the Fed due to complete QE2 in June and more importantly there is no signal that they will be shrinking it's balance sheet or raising rates, both of which is keeping a nice floor on all risk assets. If there is a red flag out there for the bulls it is that US treasuries have rallied significantly from the Feb swing lows and is close to threatening the March swing highs made when everyone rushed to safety after the Japanese earthquake. This would seem contradictory to rising equity prices and is probably a sign that the bond market does not believe the rise in equity prices to be reflective of higher economic growth or more specifically the bond market does not believe longer term inflation to be a factor at this point. Of course it could be a case of people reallocating their bond portfolios after continuing downgrades to Japan's credit rating and the uncertainty in Europe. Like I've said before, you could argue that US treasury bonds are the least worst out of  the whole bunch even after S&P downgraded it's outlook. More importantly, so long as Ben Bernanke uses the words "extended period" when referring to how long he will keep rates at record lows and there is no sign of inflation outside of core then the bond bulls have nothing to worry about.

Trade wise I continue to hold my long call spread in the RUT and I am short as of last week some June /ZB call spreads with the thinking that bonds will not rise much more but may go sideways. The higher oil rises, the less inclined people are to put their money in bonds when inflation could become a real concern. This is likely if the dollar continues to sink and equities make another leg higher (which looks likely).

Looking to today, I can see that the futures are all gapping a fair bit higher probably due to first day of the month seasonalities. Gap guides show reasonably good probabilities for fading up gaps today so a reduced position size fade may be in order. If you want to play it safe, I would probably fade the TF but only for partial gap fill. (TF because it has more leverage so you can scalp fewer points for same profit in ES).