There was no post Thanksgiving pause and expectations are improving. Last week was another one for the record books with the Dow gaining 673 points even after a -350 point intraday decline on Friday. The bogus Flynn headlines caused a selling panic that lasted for more than an hour before calmer heads prevailed. The Brian Ross special report was corrected twice and the reporter was suspended for four weeks without pay for reporting incorrect news.

The intraday drop knocked 300 points off the Dow in about 8 minutes and sent the Nasdaq down triple digits. That should have severely damaged investor sentiment but the S&P futures are up nearly 17 points Sunday evening with the Dow futures up more than 230 points.

Fueling this surge was the corrected story plus the positive Senate vote on tax reform. Now the House and Senate bills will go to a conference committee and the merged bills will be voted up or down by both houses sometime before Christmas if the president meets his deadline.

The expectations for some kind of tax reform passage has caused investors to become bubble headed. While I know cutting the corporate tax rate to 20% is supposed to raise S&P earnings 8% to 10% and add 250-270 S&P points, the tax cuts are not likely to take effect until 2019. This is a little early to be chasing stock prices into the stratosphere on 18-24 month expectations.

Investors as a herd are not known for rational thinking. Once the herd is moving quickly in one direction, portfolio managers have to chase the trend to avoid being left behind. We are seeing that over the last week. Sentiment is surging and that means stocks are likely to go higher.

The mini flash crash we saw on Friday could be repeated at any time without any warning on almost any headline. Euphoric markets can turn on a dime if that bubble bursts for any reason.

The Dow and S&P are overbought. Nothing prevents them from becoming even more overbought but that just increases the risk. The S&P is fighting resistance at 2,650 but we could blow through that at Monday's open if the futures hold over night.

Support is well back at 2,600 and that is entirely possible and the trend would remain bullish.

After the Dow's 673 point gain last week and 200 point gain the prior week, another 250 point gain on Monday is going to be a lightning rod for the bears. They are going to hit that spike in volume but maybe not on the first day. Very few bearish investors have a death wish so they would want to see a pause and possibly some fading before backing up the truck.

The Dow is already very unsupported and adding another 250 points at the open on Monday could scare away real buyers. This should be an interesting week.

The Nasdaq is definitely less bullish. The index has faded for three days after Tuesday's closing high. The -136 point intraday drop on Friday saw a 110 point rebound but all but two of the big cap tech stocks closed in negative territory. The big cap stocks are broken. Quite a few are down from their highs and struggling to hold over support. Since they led the charge to new highs in November they are due for a rest. There is a lot of uncaptured profits for the full year and they could continue to be weak. However, with the rising short interest there is always the possibility for another monster short squeeze. The Nasdaq futures are only up +30 on Sunday evening.

The Russell 2000 fell -46 points intraday to test support at 1,500 and recovered all by 7 points on the rebound. Since this is a much broader index, the strong rebound was apparently broad based and that suggest a continued positive market.

The earnings calendar picked up slightly for next week but it is mostly retail and the highlight will be Broadcom (AVGO).

The economic calendar is highlighted by the government funding deadline on Friday and the potential government shutdown if the House and Senate cannot agree on a funding compromise. This is a temporary market killer if the battle turns nuclear.

The ADP and Nonfarm Payrolls are the next most important but without a major miss of expectations they will be ignored.

I am not a fan of buying blow off market tops. I prefer to wait for a bout of profit taking in the market and in individual stocks before putting money at risk. I have been expecting some serious profit taking in January but a blowout market over the next week or two could pull that forward into December.

Obviously, there is no guarantee that the market will not continue higher or that it will decline as the euphoria fades. I am afraid my January bias is coloring my opinion of the current gains. If the market does continue higher our portfolio will benefit. I only hope the chip sector recovers so that Nvidia and Micron can rebound.

I would caution about putting new money at risk until we do see some profit taking.

Enter passively, exit aggressively!

Jim Brown

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