The normal end of October window dressing never appeared and the negativity is increasing.

The uncertainty over the election escalated significantly on Friday with the FBI announcement and that could easily push portfolio managers to lighten up once the calendar turns to November and their fiscal year end is behind them.

There was some big cap tech buying on Monday when the Nasdaq 100 made a new high but the last four days have been consistent declines. With 26 of the Dow components already reported there will be a distinct lack of bullish sentiment for that index. Those stocks that have already reported will be suffering from post earnings depression now that the earnings excitement has faded. There are no Dow stocks with earnings this week.

The biggest blow to market sentiment came from the small cap indexes. The Russell 2000 broke below critical support at 1,200 and is now unsupported until 1,095. There is a lot of air on that chart from 1,200 to 1,095. The indicators are in full decline and I would not expect an imminent rebound. The S&P-600 small cap index has an identical pattern to the Russell.

The broader Russell 3000 Index ($RUA) is showing the same pattern as the S&P-500 with a close on Friday just above critical support at 1,250. This is the 3,000 largest stocks in the market so this index IS the market. The potential for a breakdown this week is very strong and support is a long way off.

The normal market interrelationships are still intact. The rising dollar has pressured oil prices along with the headlines out of OPEC.

The Semiconductor sector has weakened after failing to make a new high on some positive earnings and M&A in the chip sector. This is negative for the Nasdaq.

The Biotech sector was weak once again with the $BTK closing just above 2,950 on Friday. The weakness in this sector also weighed on the Nasdaq. However, the BTK was not as weak as expected given some major declines in drug/healthcare stocks. The BTK may be trying to form a bottom although there is no clear support in the 2,950 area.

The Dow Transports actually held up well for the week despite some earnings problems with the airlines. The transports are not suggesting the Dow will decline but they could always follow the Dow lower if that support at 8,000 breaks.

The high yield market is also holding at the highs and this will provide support for the broader market. The S&P normally follows the HYG but there was a sharp downtick after the FBI headlines on Friday.

The percentage of S&P-500 stocks over their 50-day average declined slightly to 33% but are still holding above the January and July lows. This is a thin straw to grasp but it is still a mildly positive point.

I wrote last weekend that the markets were weakening ahead of the election and I am afraid we could see this trend increase this week. Once we are into November, portfolio managers will be free to sell those positions they held over the October 31st year-end and they could be raising cash to use once the election is over.

We should continue to avoid being overly long and keep a list of stocks we would like to buy at a lower level. We may get that chance.

Enter passively and exit aggressively!

Jim Brown

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