They say you should never watch sausage being made or legislation being created. Both will give you indigestion. In our current plight both houses of congress are working to craft a tax reform package that will eventually be passed separately by each house and then sent to a conference committee to merge the plans together into something that has a chance of being passed into law.

The current proposals contain something for everyone and some of the features will actually raise your taxes while others will lower taxes. This is a professional sleight of hand trick played by both houses. "Look at how much these features will cut your taxes and don't worry about these other features because they only apply to rich people."

There will be daily changes to both proposals and great fanfare when they each come to a vote. The problem will be when the merged proposals come up for a vote and the GOP only has a 1 vote margin, if Roy Moore drops out of the race or is defeated. One vote is nothing. Any two senators can voice objections to the bill and it goes down in flames and takes the market with it.

The market drop on Thursday came after the senate version leaked out with no change in corporate taxes until 2019. With all the anticipation in the market for lower taxes and higher earnings in 2018, that was a serious blow. A 20% corporate tax and repatriation of $2 trillion in cash from overseas was expected to magically raise S&P earnings by $15 a year and add 270 points to the S&P. Since investors have been expecting that all year we have probably pulled quite a few of those points forward into 2017. The potential for skipping a year was a punch in the market's gut. If that became true we could expect to see those points subtracted from the market until late in 2018 when expectations would begin to rise again.

The problem with investors watching legislation being created is that they tend to have knee jerk reactions to every bit of potentially negative news.

For the rest of the year there are only 14 calendar days of joint sessions of the House and Senate. There is almost zero chance that a merged tax reform proposal will be voted on in 2017 and it could be February before something is passed. That in itself suggests that 2019 will be the first effective year. Once investors figure this out, we could see a lot of profit taking.

Because of the way funds are structured and bonuses are paid, I do not expect a material decline in 2017. However, January is shaping up to be a rocky month.

You may remember January 2016. The November high on the S&P was 2,116. The January 20th low was 1,812, a -304 point drop. When the tax calendar rolls over to a new year, there is sometimes a tendency to close out those winning positions and head to the sidelines to consider new positions for the coming year. With all the profit built up in 2017, there could be a considerable decline in January and the tax reform legislation will get the blame.

The S&P is only 12 points below its record high close despite two days of declines. That is hardly a serious market drop. The dip buyers are alive and well. Support is 2,565 followed by 2,545.

The Dow is still at risk with a large air pocket under the 23,300 support that was tested on Thursday. If that level breaks, the dip buyers could remain on the sidelines in hopes of getting a better buying opportunity. The next material support is in the 22,275 range and that is a very long drop should it occur.

The Nasdaq led the rebound over the last two weeks but the large cap tech stocks are starting to look tired. Multiple stocks have issues and stocks like Netflix and Facebook are in decline rather than rising. The Nasdaq has averaged a triple digit drop about every 4 weeks and it has only been two weeks since the last one. There could be room to run but the sudden surge over the last two weeks is looking tired. Regardless the index is only about 39 points from its record high close so any selling has been minimal.

The Russell remains the weakest index and there was no rebound on Friday. The small caps could weaken market sentiment and pull everything lower.

The earnings calendar is shrinking although the last three Dow components report this week. They are not expected to provide material volatility for the index. 457 S&P companies have already reported earnings with only 18 expected to report this week. The earnings excitement will continue to fade.

The economic calendar is busier this week than last with the most important report the Philly Fed Manufacturing Survey followed by the CPI/PPI reports. None of these are expected to be market movers.

We are in the post earnings depression period. This week and next are typically the weakest in November. Last year the S&P fell 69 points in the last two weeks of the month. History rarely repeats exactly but there could be some weakness as a result of the earnings decline and the tax battle in Washington. President Trump will be back in Washington and that always adds another unpredictable element to the political risk.

Normally I suggest sticking with the trend and buying the dips but this week I would urge a little restraint. There are a lot of cross currents in play and it will not hurt to watch from the sidelines. Losing a week is far more preferable than losing money.

Enter passively, exit aggressively!

Jim Brown

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