The big cap indexes declined about 3% at their lows in what could be an average bout of profit taking. After a strong rally of multiple weeks, it is not unusual for the markets to pull back an average of 3% before continuing higher. There may or may not be any headlines that trigger the event. Normally any headlines are blamed whether they had any material impact or not.

In our case last week, the China trade talks were blamed but it was more than likely just exhaustion after ten weeks of gains.

We have had a nice run in 2019 with roughly a 19% rebound from the December lows. A 19% gain is outstanding since we don't gain that much in most years. We were due for some profit taking. Having the Chinese trade talks drag out with no date for a meeting of the presidents, simply gave investors an excuse to take profits.

Technically, the major indexes failed exactly where they should have at strong resistance. There was simply not enough in the way of positive headlines to overcome those levels.

The selling was not heavy although volume was moderate at 7.5 billion shares and 2:1 advancers to decliners. However, selling was broad based rather than localized to a couple sectors.

The broad-based selling was evident in the sharp decline on the A/D line for the S&P. This was the biggest decline since early December. The A/D line was 3:2 negative on Friday, thanks to the afternoon recovery but it was 4:1 negative on both Wednesday and Thursday. There were 395 decliners to 95 advancers both days. That was the worst breadth since January 22nd when the S&P fell 60 points intraday.

The Russell was the biggest loser last week and the A/D line shows. The small caps rolled over the prior week but accelerated lower the first week of March.

The percentage of S&P stocks over their 50-day average rose to 92.4% the prior week and fell back to 75.8% last week. That is a material change. The percentage over their 200-day average declined back to 54%.

The chip sector was a major drag on the Nasdaq. The $SOX traded at 1,391 on the 25th and fell back to 1,292 on Friday for a 7% decline. The index came to a stop right on the horizontal support from last summer and the 200-day at 1,300.

All the FANG stocks also declined an average of 4% for the week. It would be next to impossible for the Nasdaq to mount a credible move higher without the support of the FANG stocks. The four FANG stocks have a total market cap of roughly $2.1 trillion and if you add Apple that rises to $3 trillion. That is a major portion of the weighting in the Nasdaq indexes.

The Russell is leading the market lower. The index lost 4.5% last week and is showing no sign of a recovery. I scanned the charts of more than 300 small cap stocks this weekend and I doubt there were 20 that were positive. I would be very surprised to see the small caps rebound in the coming week.

The Russell posted a textbook resistance failure at the 200-day and appears headed for a retest of 1,500 and possible 1,465. All the oscillators are negative and declining rapidly. There is no reason to buy these stocks today.

I would urge caution until the market rises on solid volume and the S&P trades convincingly above 2,750. The overbought pressures should have faded after last week but there is still no reason to buy. Q1 earnings are weak, the economy is weakening, China's economy is imploding, and Britain is racing toward a hard Brexit that could crash the economy in the eurozone. Be patient, wait until the market confirms a new uptrend.

Enter passively and exit aggressively!

Jim Brown

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