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This week's soap opera in Washington, D.C. was  truly the "theatre of the absurd" as Congress and the President wrangled over an "historic" $39 Billion budget cut that pales sadly in comparison to the $189 Billion deficit that the Federal Government ran up in March alone. 

We'll discuss this in greater detail in a moment, but for today, Wall Street Sector Selector is content with its positions in gold, oil and inverse exchange traded funds.  We remain in the defensive mode, anticipating stronger headwinds ahead.

On My Radar

Chart courtesy of StockCharts.com

In the chart above we can see that the S&P500 remains in a bearish signal mode with a price objective of 1160.  Strong overhead resistance is at 1330 which held this week and support lies at the 1250 level.

We have been in this range for the last 25 trading days but, as always, this sideways action will be broken one way or the other. 

Based on current fundamental and technical elements, we expect this break to be on the downwards side of the range.

The View From 35,000 Feet

The big news this week was the 11th hour resolution of the bill to keep the government open which resulted in an "historic" cut of $39 Billion.  As mentioned at the outset, this is truly the theatre of the absurd because the deficit in March alone was $189 Billion, and so far for this fiscal year, we have racked up a budget deficit of $830 Billion according to the Congressional Budget Office, up $113 Billion compared to the same period last year. 

Of course what went largely unsaid is that this fiscal year is already half way over and the discussion of the 2012 budget is about to get underway along with the horse trading that is about to ensue over raising the Federal debt ceiling of $14.3 Trillion that is set to be exceeded in mid May.

So it should be good entertainment as the second and third installments of the "theatre of the absurd" get underway this coming week.

Economic reports were biased to the positive side this week:

Positive:

ü   Initial unemployment claims declined

ü   Continuing unemployment claims declined

ü   Consumer Credit rose

Negative:

ü   March ISM declined

In geopolitical news, the Middle East remains a hotbed of unrest as the Palestinians and Israelis continue hostilities in the Gaza Strip, protesters in Syria and Egypt persisted with their demonstrations, and the war in Libya has reached what everyone is now recognizing to be a stalemate with a fire doing unknown damage to that country's Sarir oil field.

All of this unrest resulted in West Texas Intermediate Crude Oil hitting a 2 1/2 year high of $113/bbl and Brent Crude hitting $126/bbl, its highest level since July, 2008.

In Europe, the ECB raised interest rates, an action that is sure to put more pressure on the previously struggling peripheral nations, and Portugal is already being squeezed for more cuts as they are now a ward of the European Central Bank.  Greece is in recession and everyone wonders if Spain, often thought of as too big to save and too big to fail, is next on the chopping block.

U.S. Treasuries and the U.S. Dollar continued their slide while gold set a new record of $1476/oz and silver hit a 30 year high of $40/oz.

Finally another earthquake hit Japan on Thursday and the Japanese government said that Japan's economy was in "severe condition."

What It All Means

We continue to live in historic times fraught with challenges, danger and uncertainty.  Rising oil prices are never good for Western economies and the looming fight over raising the debt ceiling and the 2012 budget proposal put forth by U.S. Representative Paul Ryan will set the economic tone for the rest of this year and next. 

Dr. Bernanke and his colleagues at the Federal Reserve say that inflation is "transitory," however, the precious metals and oil markets seem to be literally screaming otherwise.

The Week Ahead

Major Issues/Themes: This week brings significant economic reports and the kickoff on Monday of earnings season with Alcoa reporting after the bell. 

Important reports to watch are Alcoa on Monday, JP Morgan and March Retail Sales on Wednesday, Google earnings on Thursday and manufacturing and industrial production reports on Friday.

Monday: Alcoa Earnings Report

Wednesday: JP Morgan earnings, MBA Mortgage Index, MarchRetail Sales, February Business Inventories, April Fed Beige Book

Thursday: Initial Unemployment Claims, Continuing Claims, March Consumer Price Index, Fairchild Semiconductor and Google earnings reports

Friday: March Consumer Price Index, April Empire Manufacturing, March Industrial Production, April Michigan Consumer Sentiment

Sector Spotlight

Leaders: (NYSEArca: SLV) iShares Silver (NYSEArca: EPOL) iShares Poland

Laggards: (NYSEArca: EWJ) iShares Japan Index (NYSEArca: IYT) iShares Transportation

This week I was in Germany where it was unseasonably warm in Frankfurt with lovely spring days and warm evenings by the Main River.  The restaurants and bars were full as soccer played on the televisions and I couldn't help but wonder how much longer the Germans will be willing to carry their weaker neighbors in the European Community.

Wishing you all good things, 

                                     To get a full copy of this report and a Complimentary Special Report from Wall Street Sector Selector, click here:

John Nyaradi

Publisher

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.