Normal bouts of profit taking rarely last more than a week. For once the Sunday night futures are not imploding and the session is calm. The big 3.2% decline in the Nasdaq last week may have run its course. With the Q3 earnings cycle scheduled to start on Friday, it is time for traders to begin stocking up on their favorite earnings plays. The Nasdaq declined to support at the 100-day and the Russell 2000 at the 200-day. The S&P hit the 50-day. With all these support levels reached we should have a good chance for a decent rebound. There is never any guarantee and we just have to wait and see how it plays out.

There is a lack of market news this weekend and the Kavanaugh disaster is starting to fade. Now the focus shifts to the mid-terms in 30 days. Recent polls suggest the republicans increased their market share as a result of the Kavanaugh confirmation. This should keep the market from tanking on fears of a blue wave election.

The bond market is closed on Monday for Columbus Day and that normally means lower volume on the equity markets. With yields on the ten-year rising sharply and causing some of our recent volatility, a day off from bonds could be a positive.

There are only five reports of consequence this week. The NFIB survey last month set a new record high for its 45-year history. Another high would be bullish. The twin price indexes are not expected to show a material increase in inflation but they will still be watched carefully.

The earnings calendar will begin to accelerate in intensity after the big banks report on Friday to kick off the Q3 cycle. The banks have had a volatile six months despite the continued Fed rate hikes, which should benefit them in the future.

The S&P has declined sharply since the new intraday high on Wednesday. The 70-point drop from Wednesday's high at 2,940 to Friday's low at 2,870 was traumatic but it is not the end of the world. That was only a 2.4% decline and we have those routinely during every move higher. The index came to a stop right on support at 2,870 and the 50-day average at 2,877. This is exactly where the index should have stopped.

Unfortunately, every correction always surpasses the levels where it should stop. There is a buy the dip rally and then sellers return to create a lower low. I do NOT expect that this time. All the fundamentals are too strong and the Q3 earnings cycle begins late this week. I believe we will see an earnings rally. However, that belief and $5 will only buy you a cup of Starbucks overpriced coffee.

I wrote on Thursday that I expected the dip to be bought but maybe not on Friday because of weekend event risk. The Kavanaugh confirmation was playing out in Washington and that was significant, not because of Kavanaugh but due to the risk for President Trump and his administration. Had the confirmation failed, a new pick would have been named but the democrats would have been emboldened and enthused supporters at the polls in 30 days. A change in control of the House and the promised impeachment attack on both Trump and Kavanaugh, would be seriously detrimental to the markets. With these risks maturing on Saturday, some investors elected to be in cash.

Kavanaugh was confirmed, the complexion of the court has been changed for years into the future and republicans are now emboldened that they can win in November. Time will tell if they can avoid losing the house but they are poised to pick up additional seats in the senate. This should be market positive because the current economic policies would continue into 2019. It will be interesting to see how the market reacts next week. The bond market is closed on Monday so we may not get a big directional move until later in the week. If the rates spike higher, all the political undercurrents will not matter and equities will continue their decline.

The S&P should rebound from Friday's support levels. Should is the key word in that sentence. There is never any guarantee. So far, a 2.4% decline is simply normal profit taking. If we did see the 2,870 level break the next target would be 2,800 and that would severely damage sentiment ahead of earnings.

The Dow only declined 11 points for the week but that is not the real story. At the lows on Friday, the index was down -650 points from the Wednesday high. The rebound in the tariff sensitive stocks had lifted the index to 26,951 on Wednesday. The resulting market crash on Thursday and Friday erased all those gains. The Dow respected short term support at 26,380 and rebounded slightly on Friday afternoon but only six stocks finished positive.

The big cap tech stocks had a bad week. The 3.2% decline in the Nasdaq was -257 points. That is bad news for anyone holding tech stocks. The good news is that the fundamentals did not change. Earnings should be in the 25% range for Q3. Eventually the Nasdaq will find a bottom and we could see a significant rally.

The Nasdaq tested the support at the 100-day on Friday and it held but only barely. It may not have been convincing enough to pull investors back into the market.

The Russell 2000 declined -3.8% for the week and is now down -7% from the August highs. The Russell is the weakest link in the market and it normally leads both up and down. If the Russell does not reverse almost immediately, the entire market could be in jeopardy. Small caps stocks are most at risk from an overzealous Fed and higher interest rates.

The first two weeks of October are known for the most lows for the second half of the year. The normally weak August/September trend to cause six month lows in early October. August and September were choppy but not materially weak. However, the Russell has already made a new 2H low and the Nasdaq is not far behind. The Dow and S&P are not in any imminent danger but the month is still young.

I believe the market will rebound this week. I am not picking a specific day because the bond holiday on Monday and the negativity from last week could produce a choppy start. I would buy the dip.

Enter passively and exit aggressively!

Jim Brown

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