The first week of September followed the script exactly.

The major indexes were volatile but only the Nasdaq suffered significant losses. That was mostly related to specific big cap stocks rather than a decline in all stocks. The FAANG stocks all declined and it is hard for the Nasdaq to move higher in that situation. The ultra big cap tech stocks like Apple, Google, Facebook, etc, have too much of an impact on the index because of their weighting.

Readers of this commentary are familiar with the chart below. The correlation between the big four FANG stocks has fallen apart. I would put Apple on there as well but I can only have four symbols in this chart program. Facebook is imploding and Google lost all the gain from the prior two weeks. Until all of these stocks are moving higher again the Nasdaq is going to remain under pressure.

The Nasdaq is also fighting a problem with declining breadth. When the generals are falling it kills sentiment for the rest of the sector. The decline has been steady over the last 7 days although Friday was almost even. There were 1,280 advancers to 1,575 decliners. Declining volume of 978 million shares was slightly higher than the 906 million advancing shares.

The tech sector led us higher, mostly on the strength of the big caps. I warned repeatedly that the narrow breadth of the rally was going to be a problem when those dozen or so stocks decided to decline.

The A/D line on the S&P is also fading. On Friday, the internals were much worse than the Nasdaq with 322 declining stocks to 168 advancers. That is a 2:1 disadvantage. Since the big cap tech stocks are also in the S&P they added to the declines in tariff sensitive stocks.

The S&P is likely targeting support at 2,850. The index closed back below the January resistance high but only fractionally. If the 2,850 level breaks the next target is 2,800 and that would be a critical support point. Note that the oscillators are all weakening.

The Dow has fallen into a minor trading range between 25,800 and 26,000. That is a great spot to wait out the September volatility but I doubt it will hold. There is a headline in our future that will cause the index to move significantly. We just do not know what or when at this point. We really so not want to retest strong support at 25,000 and I definitely do not see it unless the situation with China turns a lot worse.

The Nasdaq is also following the script. The index failed exactly at uptrend resistance and held almost exactly on uptrend support. These lines were drawn weeks ago and the index honored them exactly. The 50-day average was ignored in the first five months of the year but it has been strong support on the last three dips. That means it should be support at 7,826 on any further decline.

The Russell is holding just over light support at 1,708 and right on uptrend support. This is where it should rebound, all things being equal.

I was glad to see there was no major change in investor sentiment for the week. That confirms my feelings that this was simply a bout of profit taking after a sprint to new highs. Investors do not seem to be worried and retained their 42% bullish rating.

I would use any further declines as a buying opportunity on stocks that have given back their gains. Option premiums will be lower and there is significantly less risk in a stock that has corrected. September has three more weeks and second half market lows normally occur in early October. Be prepared.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email