There are still 8 days left in August but for all practical purposes, the month is over after expiration. Volume is going to shrink even further and the indexes could be dormant until after Labor Day. The keyword there was "could."
The six most volatile weeks of the year begin on Monday. Earnings are over and the end of the fiscal year for mutual funds is October 31st. That only gives them barely over two months to restructure their portfolios for 2017 and try to capture some performance to report in their marketing materials for 2016. The next six weeks is when they dump any stocks they are tired of holding and pick up new ones for 2017.
Typically the market lows for the second half of the year occur in September and October. So far this has not been a typical year and there has not been a decline in August. The conventional wisdom suggests that when one political candidate is far ahead in August the uncertainty fades and Q4 market gains are pulled forward into August/September. In about six weeks, we will be able to tell if that wisdom was right or wrong.
The indexes have all plateaued at their recent highs. The Dow made a high last Monday and then faded as the week progressed. There was no material weakness in the Dow, just a lack of excitement now that earnings are over.
There are multiple levels of converging resistance at 18,625 so moving higher could be a challenge.
The S&P is struggling higher, layer by layer. The upper resistance is 2,187 and current support at 2,175. Critical support is 2,160. The dip to 2,150 on August 2nd is the point of no return. If that level breaks, we could be seeing an extended decline but that is not expected.
The Nasdaq has a similar pattern with a series of stair step gains cumulating with the spike to a new high on Monday. The 5,200 level is critical support followed by 5,100 and 5,000. The Nasdaq and Russell 2000 have a very slight uptick in trend while the S&P is flat and the Dow is slightly negative. As long as the Nasdaq and Russell continue to tick higher the market should remain healthy.
The Russell 2000 actually closed at the top of its recent channel with the exception of the Monday high. The Russell is showing slightly bullish sentiment despite being locked in its recent rages more firmly than the other indexes. A Russell breakout could put a fire under the broader market.
There are very few earnings next week. Only Best Buy, Hewlett Packard and Sears are likely to generate some interest but neither is expected to move the market. The Q2 cycle is over and only a few stragglers remain. There are no earnings reports to provide market excitement.
The economic calendar is headlined by the Janet Yellen speech on Friday. Her topic is Fed policy tools but she is widely expected to give some hints as to rate hike direction. If she remains dovish the market will probably react well. If she begins to take on a more hawkish tone, the market could react negatively.
The GDP on Friday could also be a pothole in the market road but we have a bit of confusion. Is bad economic news now good news for the market or will good economic news be bad news for the market?
I recommend keeping your stop losses tight and plan to reestablish positions on any September dip. Market lows for the last six months of the year tend to happen in Sept/Oct. Remember the Boy scout motto, "Be Prepared."
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