The S&P has not made a new closing high since five days ago on July 22nd.

The S&P has traded in a very narrow 20 point range from 2,156 to 2,176 since July 14th or 12 sessions. We have not seen a range this narrow in years. The index did make a temporary intraday high at 2,177 on Friday but immediately pulled back to close at 2,173.

There were some concerns on Friday about the European bank stress tests but those were offset to some extent by the month end inflows of cash. The S&P gained 3 points and the Dow lost 24 points.

The real indicator for me was the Russell 3000 or R3K. I have been talking about the larger indexes for the last couple of months and this is a true representation of the broader market. The R3K did make a new closing high on Friday at 1,284.27. The index has traded in a very narrow 13-point range since July 14th. That is roughly a 1% range on a 1,280 point index.

However, the trend has had a slight upward bias the entire time to end with the new closing high on Friday.

The indicators are starting to show fatigue from holding in this pattern so long. The MACD suggests the index is about to roll over but the new high suggests there may be a new leg higher.

The 2,400 stock NYSE Composite Index has the reverse trend. The solid top over the last 14 days has begun to fade to the downside. The NYSE is still about 465 points from a new high. Unlike the R3K, which is the 3,000 largest stocks, the NYSE has a lot of small stocks as well as large. There are also a lot of energy stocks, which weighed on it last week. The indicators are negative suggesting the top is in. However, the chart pattern is normally a continuation pattern of the original move, which would be higher.

The Vanguard Total Stock Market ETF (VTI) contains 100% of the "investable" stocks in the U.S. market with 3,650 stocks in the ETF. The ETF also set a new high on Friday at $111.42. The chart looks identical to the R3K.

So what can we deduce from looking at the three largest indexes of the market. First, the two biggest ones closed at new highs on Friday despite the weekend event risk and EU stress tests. Secondly, they have all established strong support levels at their elevated heights. The NYSE is the weakest because of the higher percentage of energy stocks. If we eliminate that index from the discussion, the outlook becomes clearer.

From a purely technical basis the market appears to be going higher. It would take a major event to crash through that three weeks of support that has been formed. Every minor dip is immediately bought.

On a fundamental basis the earnings picture is improving and more companies than normal are beating on earnings. Revenue has actually turned fractionally positive after six months of declines. If you are going to invest in stocks you want to do it when the earnings cycle is about to turn positive.

On an economic basis the economy is in ultra slow growth mode at about 1% over the last 9 months. It does not appear to be getting worse and the strong jobs numbers were encouraging.

Oil prices are collapsing and that will hurt energy equities but crude prices should turn up in October as we reach a balance of supply and demand or so the EIA is predicting. We would want to buy energy equities whenever crude prices dip under $40.

The consumer is seeing a windfall with fuel prices averaging $2.14 a gallon this weekend. This is saving U.S. consumers $160 million a day because of the cheap fuel. This is allowing them to buy new cars, go out to eat, take vacations, etc. The cheap oil prices are keeping the economy growing at that 1% rate.

However, Morgan Stanley, Goldman Sachs and JP Morgan are expecting a recession in late 2017. While that is a normal course of events and will depress the market, it should not happen until the recession actually appears.

We are entering the period of seasonal weakness in August and September, the two worst months of the year. They are especially weak in election years.

To summarize the charts are telling us the markets are going higher despite the perceived weakness ahead. The reason is simply. There is no alternative to stocks. With $13 trillion in government bonds yielding a negative interest rate overseas, there is a steady flow of cash into the U.S. markets. Meanwhile U.S. investors are sitting on $12 trillion in cash in money markets and brokerage accounts because they believe the market has topped. Two weeks ago, fund managers were sitting on the most cash since 2001. With the markets going sideways for the last two weeks I doubt they have put that money to work.

We have the fuel to spark a monster counter trend (seasonal) rally but we need a spark to set it off. Up to this point, investors have seen the S&P move over 2,132 and stall at 2,175 and they are still confident in their assumption that the markets will crash in August/September. Bank of America is in the news almost every day calling for a 15% crash in late summer.

IF, and that is a capital IF, the market succeeds in moving materially higher this week, we could move into launch mode. With all the "smart" money betting on a market decline, there could be a huge short squeeze, but we need that spark.

Unfortunately, I do not know what that spark might be other than falling yields in the USA and better than expected stress tests in Europe.

I have been cautioning about being overly long BUT we need to retain a long bias until a market breakdown occurs.

In order to remain fair and balanced, there are risks to a bullish scenario. One of them is the post earnings depression phase. August is known for post earnings depression declines. Last week was the peak in the Q2 cycle so we are at risk for that depression.

This is an election year with two very polarizing candidates and the polls are locked in a dead heat with each showing a 44.3% voter preference. The direction of the country would be 180 degrees opposite depending on who was elected. This should cause additional uncertainty over the next 100 days.

The percentage of stocks over their 50-day average has declined from 87.4% last week to 75.6% this week. This is that post earnings depression settling into stocks. The percentage over their 200-day average is holding right in the 78% range and that is a function of the indexes trading sideways at the highs. When that percentage begins to decline, we should pay close attention.

The relationship between the chip stocks and the Nasdaq continues and the chips have broken out to a new high and they are dragging the Nasdaq higher. This supports the bullish case.

I would recommend that investors retain a bullish bias until those short-term support levels on the major indexes fail. That would be 1,275 on the Russell 3000 and 2,160 on the S&P-500. Obviously, nobody can predict day-to-day market direction so we have to follow the trends rather than guess on direction. With the two largest market indexes closing at new highs on Friday, it suggests we are going higher.

Enter passively and exit aggressively!

Jim Brown

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