There is little doubt that the bulls remain largely in control of the ball game - after all, it was just five short days ago that all the major indices were movin' on up to new highs for the current bull cycle. However, given the duration of the current bull run, the action last week suggests that our heroes in horns may be suffering from a lack of conviction at the present time.
Exhibit A in our argument would be the action/reaction to the news that the U.S. had finally "gotten their man" via the operation in Pakistan. Although futures rallied nicely on the official pronouncement that Bin Laden was dead, the lack of follow through during Monday's session suggested that perhaps traders had other things on their mind (such as the potential bottoming action in the dollar).
The second exhibit to be presented from our side of the table is market's action on Friday. After three fairly disappointing data points last week, the bulls finally got some good news on the jobs front as the Nonfarm Payroll report came in well ahead of expectations. Once again, the market popped up nicely in the early going only to succumb to selling throughout the remainder of the day.
Sure, the news that Greece may (or may not) be talking about leaving the Eurozone, or defaulting on debt, etc., could have caused traders to think twice about getting too excited in front the weekend news cycle. And it is true that the dollar once again put in a spirited performance. But, the bottom line from a chart perspective is Friday's action wasn't exactly positive.
Next up in our pseudo presentation this morning is the relatively lackluster readings from many of our market models. When markets are making new highs, the market's internal indicators typically tend to sing a happy tune and confirm the move. And while our models are not suggesting that there is trouble ahead, the distinct lack of enthusiasm in the majority of the readings may be a sign that the current run for the roses could be getting long in the tooth. (As an example, our weekly market model has had difficulty staying positive for the past couple of months now.)
But then again, all of the points presented above may be unimportant as the reversal in the dollar may actually be the primary factor driving the action. As we've been suggesting with regularity lately, the recent reversal in the dollar could easily be causing traders to bail on the risk/dollar-carry trade. Remember, a rising dollar puts a crimp in all kinds of popular trading strategies being implemented by the fast money these days.
So, if you are trying to determine the driving factors in the stock market right now and the macro picture isn't your thing, you can always just continue to watch the dollar. At some point, the current spike higher in the greenback will reverse and the "risk assets" will likely bounce. And after that, it will be interesting to see if it's "game back on" for the risk trade.
For now though, we'll continue to watch the dollar and be on the lookout for renewed signs of conviction from the bull camp.
