The Q3 earnings cycle kicks off in earnest next week. More than ten times as many companies report next week than last week. Netflix will be the first FAANG stock to report and is likely to color sentiment for the big cap techs with their report. There are 9 Dow stocks reporting this week (pink) and Goldman Sachs and IBM are likely to be market movers on Tuesday. GS is before the open and IBM after the close.

Q3 earnings are expected to rise by 4.4% but normally Q3 estimates are low by about 4%. The problem facing the market is the hurricanes that disrupted business in multiple states right at the end of the quarter. We have already seen several companies report earnings disappointments and blame it on the storms. If this turns into a flood of earnings misses it could derail the market. Normally a storm related earnings miss is ignored. However, with Q3 estimates so low already after multiple quarters of double dig gains, it could push them back to flat or even negative growth depending on the number and severity of the misses. While I am not expecting that, it is a possibility.

The major indexes made new highs last week but it was sporadic. The gains were lackluster and resistance levels on the Nasdaq and S&P were only slightly broken. The S&P spent all week chipping away at the 2,550 level to finally close at 2,555, which is now current resistance. The index consolidated in place all week and digested the gains from the prior week. I would much rather have that kind of consolidation than 2-3 days of declines. This allows us to start next week already at the highs rather than having to fight our way back to them.

The Dow is the index that could give us some trouble next week. It is well into overbought territory and with 9 components reporting earnings there could definitely be some volatility. There are 11 stocks the following week and that will be even more volatility since we will have a third of the index already in their post earnings depression phase.

The 23,000 level is the new target and it could produce some selling when reached given the overbought nature of the index today.

The Nasdaq closed at a new high on Friday and eased just slightly above the 6,600 level. The next resistance is 6,700. The big cap techs have been spotty. Some have been up, some down and only a handful have actually had a positive trend. Most were down slightly early in the week. Until they begin performing as a unit once again the Nasdaq is going to have trouble maintaining an upward trend. Nearly all appeared to be moving higher as of Friday so maybe we will have a good week ahead. The consolidation appears to be over on the Nasdaq.

The Russell 2000 is holding the majority of its gains having lost only 12 of the 162-point rebound. Support is now 1,500 and we need that to hold or a breakdown could trigger some stop losses. The chart is still very overbought even after nearly two weeks of consolidation but holding the highs is bullish.

The economic calendar will be focused on home sales and September is not normally a big month for sales. Most people buy earlier in the summer so they can be moved in before school starts.

There is a real risk of another North Korean event with multiple reports of missiles on launch vehicles being positioned all around the country. The US and South Korea have joint exercises next week and the Chinese Communist Party Conference begins on the 18th. Both events have drawn provocations from North Korea in the past.

The earnings calendar is likely to overpower the economic calendar since everyone is anxious to see if the storms caused a significant problem.

Investors should remain in buy the dip mode, assuming as eventually get a dip. The lack of a material decline has investors buying every minor fluctuation before an actual dip can occur. Eventually this will fail and we will get a retracement of sorts. Assuming there is no geopolitical event I would look for market weakness from late October into early November. I am not expecting a material decline but simply some profit taking as we enter the post earnings depression cycle.

The next major hurdle is the budget battle and debt ceiling expiration in early December. Assuming lightning does not strike and Congress handles these issues in advance, I would expect negative headlines to begin around expiration week in November. Being that close to year-end, portfolio managers could decide to take profits early rather than try to hold on through December. Managers are paid bonuses on their gains and there is a lot of uncaptured profit in the market today.

For the next two weeks, I would expect a positive market but my expectations have no effect on reality.

Enter passively, exit aggressively!

Jim Brown

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