Everyone keeps talking about all the indexes hitting new historic highs. Unfortunately, that is not true.

Granted all the major indexes that investors normally follow have hit new closing highs but the NYSE Composite Index failed to achieve that goal. The actual difference is negligible but it is worth noting. The May 21st, 2015 closing high was 11,239.66. The December 13th, 2016 closing high was 11,237.17, about 2.5 points short. However, the December intraday high at 11,256.07 was higher than the May high at 11,254,87. While I think that is close enough to count there is a critical difference.

Trading programs do not have a true "close" feature. They deal in absolutes. While I am sure some enterprising programmers have included a margin of error or a fudge factor in the programming, most of them deal in real numbers.

When the index hit a new intraday high on the 13th, that was the high point for the week. The trading programs took over and the distribution began. The selling came from programs because no single investor or portfolio manager could manipulate 2,800 stocks to decline when the 11,000 point index exceeded its old intraday high by a single point.

Is it material? Ask me again in two weeks. Why would programs be keying on the NYSE Composite Index? I seriously doubt it was just a coincidence but the amount of selling was minimal. We will be able to draw additional conclusions after we see what happens over the next two weeks.

I do not know if everyone remembers but back in November 2015 every headline was about the strong dollar and how it was killing earnings. The Dollar Index peaked at about 100 in November and every earnings report had big charges for currency conversion issues.

Today, the dollar index is 3% higher at $103 and nobody even mentions it. The dollar index jumped +2 points after the Fed announcement and with the Fed's increased rate hike guidance for 2017 the dollar is likely to continue rising.

Did some universal law suddenly remove the dollar from importance to earnings? Not hardly and you can bet the Q4 earnings cycle is going to have a lot of earnings misses or at least a lot of charges do to the dollar. This is being totally ignored today and it is only going to get worse as the dollar gains in strength.

The one place the impact of the dollar is really painful is in commodities like the precious metals. Gold has declined from $1,375 to $1,136 due mostly to the impact of the dollar and the expectations for a stronger economy. Silver is down -23% from the $21 high over the summer and is now at 7-month lows.

The S&P is starting to show signs of weakness. The RSI uptrend has been broken. The MACD averages are about to have a bearish cross and the last three days have each seen a lower high.

I laid out the case last week for some imminent market weakness in late December and early January. The distribution over the last week appears to suggest we are in the early stages of a market top.

While nobody can predict the market from day to day, I would be very surprised if we did not move lower in the weeks ahead. There may still be a push in the low volume market this coming week to try and hit Dow 20,000 but there are plenty of sellers waiting at 19,950.

If the broader market is going to fail, this is exactly the right spot. The Russell 3000, the largest 3,000 stocks in the market, came to a dead stop at uptrend resistance and is threatening to break short-term support at 1,340. This is the market and there is risk to 1295-1300.

The Semiconductor Index fell -1% on Friday after setting a new high on Thursday. The SOX leads the Nasdaq and that was a major reason for tech weakness on Friday. The two indexes have been in lock step for the last month and a decline by the SOX would drag the Nasdaq lower.

Lastly, the yield on the ten-year treasury has moved to a two-year high and this impacts the market in multiple ways. Real rates are rising and that impacts earnings. Investors with a large bond allocation in their portfolio, are getting killed with the sell off and they should be rotating into equities. Lastly, with yields back up in a respectable range, companies with a need for long term stability like insurance companies, will move away from equities and back into treasuries to guarantee that income. Overall, rising treasury yields are supposed to be negative for equities but in this environment, there should be more rotation out of bonds and into equities. There is reportedly a large number of pension funds that are being forced to reduce holdings in bonds/treasuries by year-end and rotate into equities. That could support the equity market going into the end of December.

I continue to believe that the market will be choppy over the next two weeks. However, I would be careful holding long positions past December 28th. The last couple days of the year are typically negative as traders position themselves for a potential January dip. This year has significant potential for a January decline so there may be a lot more end of year sellers.

Enter passively and exit aggressively!

Jim Brown

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