The Nasdaq was the weakest of the major indexes but only lost 23 points. Despite the divergence between the Dow and the rest of the market it was a calm week. Earnings continued to hog the headlines and with lawmakers now on their summer break and not back until after Labor Day, the Washington headlines are generating less attention.

The economic reports were decent with strong payroll numbers that lifted the dollar and seemed to give the Fed room to continue with policy changes at the September meeting. Earnings are on track for 12% growth in Q2 and post earnings depression has not yet appeared in the overall market.

Volume averaged 6.3 billion shares a day and there were no major volatility swings.

It was a peaceful start to August and possibly the calm before the storm. August has been down 5 of the last 7 years and has only been up 5 of the last 20 years. I know, past performance is no guarantee, etc, but we are entering a period of higher risk for the markets.

You would not know it by looking at the Dow and S&P. The Dow has posted 8 consecutive days of record highs and the S&P closed only 1 point below a record on Friday. The Dow is benefitting from a textbook rotation pattern where 2-3 different stocks take the leadership role every day and the index moves slowly higher.

The Dow has no material resistance in sight and now that it is comfortably over 22,000, that psychological barrier has evaporated. We know consecutive streaks will eventually fail and it is the depth of the failure that matters. A 30-40 point drop one day and rebound the next is not material. If the Dow begins to string a few negative days together we should be be worried. The Dow has risk back to 21,500 if a serious retracement appears.

The S&P is the sleeper index. The consolidation pattern appears slightly bearish but the index closed only 1 point from a new high. It was cleverly disguised alongside a bunch of red candles. The S&P has resistance at 2,483 from an intraday spike on the 27th but it can make a new closing high before reaching that level.

We need the headline buzz that comes when the S&P closes at a new high. We need that headline to erase some of the bearish commentary currently in the market. Whether it will help remains to be seen.

The challenge for the market is the Nasdaq Composite. The index is barely clinging to support at 6,335-6,350 with a pattern of lower highs. The Nasdaq looks like the next move will be a sharp drop under support and then a potential dive to 6,100. However, the futures are strongly positive at +21 on Sunday evening so there is a chance for a Monday short squeeze.

The FAANG stocks lost ground last week so maybe they are ready to move higher again. We will not know for several days or even until the week is complete.

The Russell 2000 lost -3.3% over the prior 7 days and rebounded only .5% on Friday. That was a lackluster rebound but maybe that is all it will take to begin a new move higher. The low on Thursday was 1,402 and just over critical resistance at 1,400.

The earnings calendar is winding down. By Friday, more than 450 S&P stocks will have reported. The volume of earnings declines significantly for the following week. The highlights this week are Priceline, Jack in the Box and Nvidia.

The economic calendar has no market moving reports. The price indexes later in the week will be the most watched because of the inflation numbers. The Fedspeak increased slightly but nobody is likely to step in front of Janet Yellen's speech at the Jackson Hole conference in late August. She will probably set the stage for tapering QE at the September meeting.

The market has ignored all the historical trends in 2017. We should not blindly assume the trend for weakness in Aug/Sep will be ignored as well. The decline normally starts late in the second week of August as earnings begin to fade. With the earnings cycle ending and kids getting ready to go back to school, investors will be more focused on cramming in a last week of vacation time than watching the market.

There is no reason to rush into the market. We have been waiting for a buying opportunity for the last several months and none has appeared. If it is going to happen it should appear over the next two months. Lawmakers come back from break in September and have 12 working days before the budget and debt ceiling have to be approved or the government shuts down. This is not going to be a slam dunk and investors may want to take some profits off the table before this deadline appears. That does not mean they are going to run out next week and take all their chips off the table. Any potential topping process could take several weeks. We just need to be patient. We have a full portfolio. If the market continues higher, we will reap the benefits without having to add to it.

Enter passively, exit aggressively!

Jim Brown

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