yes, your muscles retain water. I have been weight training for a year and a half. For the first year, my weight steadily got higher. I was building muscle, yet eating too much and not on any diet. So, i started Atkins. What was most discouraging about all the exercise, was that I thought it wasn't helping , because i had gotten so much bigger. Actually, there was muscle underneath a lot of extra fat. For a long time i wanted to stop the exercise, cuz i thought it made the fat stand out more. Thank god i didn't stop, because now i've lost weight, and the lovely shape of muscle is finally starting to show.
So, the moral is, don't stop, it's just water, you'll be way happier in the long run.