The markets started last week on the strong side before tapering off and ending the week with a modest 0.5% gain. The data on the economic front was not good. Housing starts fell to a record low and the number of continuing unemployment gains hit a record high. The housing industry continues to give us negative news. Both housing starts and building permits fell to record laws. Starts fell -12.8% from March to an annualized rate of 458,000 units (consensus 520,000) while permits dropped -3.3% to an annualized rate of 494,000 (consensus 530,000). Moreover, the weak labor market and the problems that come with it continue as well. Initial unemployment claims for the week ending on May 16 totaled 631,000 (consensus 625,000), which was down from an upwardly revised reading of 643,000 (from 637,000) in the prior week. Lastly, continuing claims jumped by 75,000 to a record 6.662 million.

This past week, eyes have been focusing on the moves in both the dollar and bonds. The Fed's willingness to print obscene amounts of money, mostly to finance the Treasury's debt, is starting to make people nervous. China, for instance, owns over $1 trillion in dollar denominated bonds. If an upswing were to occur in inflation, these assets would probably get killed. China probably won't look to sell its US bonds because others could follow and create a stampede. Additionally, the Fed's recent purchase of $7.7 billion in 7 and 10 year treasuries, helped set off a decline in the dollar and the rally that ensued in commodities. Also, as central banks look to buy bonds that their governments are rushing to issue, look for metals to continue to push higher.

The short week leaves us with a lighter than usual economic calendar. Wednesday brings existing home sales, Thursday there is an OPEC meeting and Friday expect preliminary Q1 GDP numbers.

Now on to the levels in the indices. We are still in a range, one that has now tightened a bit to 850- 930. A breach and a close under 875 will likely take us lower to 850-855. A breach of 850 would probably lead us down to 827-829 rather rapidly. On the other hand, if we held this 875ish level, we should test 900 to the upside. A close over 909 should take us to 925-929. In the event we take out that 929 level, look for a move to 930. A close over 930 probably gets us to 945-955. Watch for further clues about direction by keying off of the bonds, the dollar and precious metals...