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Bull's balloon looks to pop

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The major indexes have sunk to their lows of the session in almost a repeat performance of Monday's trade, when what appeared to be some upside economic data has found selling after a jump higher at the open.

Several economists have chimed in this morning that while March's jump in retail sales is encouraging and shows a resilient consumers, March's gains may be little-more than a rebound from the weather-depressed February numbers.

The March retail sales, combined with Thursday's trade data, suggest that first-quarter gross domestic product could be as high as 1.7%, noted David Rosenberg, chief economist at Merrill Lynch. This would be above Merrill's current forecast for a 1% gain.

The broader market consensus forecast for GDP was at 1.8% before today's reports were released.

My (Jeff Bailey) observations from today's trade begins to weigh on my more bullish outlook for the major indexes near-term, while I'm somewhat torn by the selling we've seen in Treasuries today.

It's true that a rise in the PPI could bring selling into Treasuries and make their YIELDS less attractive under the thought of a Fed tightening. Today's bond market action and trade in the May Fed Funds futures contract (ff03k) 98.80 -0.045 points, now begins to have the MARKET thinking that a Fed funds rate cut becomes more unlikely at the May meeting. Earlier this month, the May Fed Funds contract stood at 98.91 (100 - 98.91 = 1.09%) and had the MARKET looking for a rate cut of 25-basis point to bring the Fed Funds rate down to 1.0% from the current 1.25%.

While the Treasury market seems to be taking a slightly more positive view of today's economic data, the trade observed in equities isn't looking bullish at all.

While today's April consumer sentiment rose to 83.2 from 77.6 in March, I'd have to say that nay reading from "investor sentiment" would show DIVERGING reversals lower considering Monday's trade on positive news out of Iraq, and today's trade on positive news from some of the economic data.

In tounge and cheek fashion, I made what I thought was a "joke" that equity bears wanted to see some "good news" for a change to have stocks continue lower, and while I was making a joke, that may be exactly what market participants are looking for these days.

Here's a quick look at the various major market indexes and sectors. In "pink" I've highlighted what I view to be some relatively meaningful DIVERGENCE from the bond market and stock market. While I wouldn't describer the selling seen in stocks or bonds as "huge," the bond market seems to be thinking more along the lines of future interest rate hikes, which would come from economic growth, while equities show a trade this week that has it looking to sell the prior/current events in Iraq and what took place at the retail level in March.

Market Watch - 01:00 PM EST

Even further "surprising" to me, considering the negativity shown toward equities, is that the shorter-dated 5-year Treasury YIELD ($FVX.X) see more selling than the longer-dated 10 and 30-year. This has the YIELD curve flattening and normally, bodes well for stocks as this type of action tends to have the bond markets looking at either a steady to tightening Fed interest rate policy near-term.

Jeff Bailey

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