With the inauguration event risk behind us, the market should return to normal. The only problem for traders is determining which normal we are going to get.

The Dow and the Russell are near five-week lows. The S&P and Nasdaq are less than half a percent from new highs. There is (was) a tug of war in progress ahead of the inauguration. In theory, that battle should ease now that the event risk is behind us. Traders who were afraid of a potential disaster should be breathing easier this weekend.

However, just because the event risk is over does not mean it is all clear for the markets. There are still a lot of roadblocks and headlines ahead for the new administration and that will continue to cause isolated headwinds for equities.

The farther we get into January the less the political headlines will matter. The Q4 earnings cycle is going to be the driving force. This week has a heavy calendar for earnings with 12 Dow components.

The Dow closed at a five-week low on Thursday but rebounded at the close on Friday after the inauguration risk passed. The index is still hugging the bottom of its recent range and the resistance just below 20,000 is still intact but should have weakened somewhat after repeated testing. At this point, another close outside the blue support line at 19,750 would be very negative.

The S&P is fighting resistance at 2,277 and closed only 6 points below on Friday. A break over 2,280 could trigger short covering and a break over 2,300 could trigger a new leg higher. The S&P closes have been clustering at the highs for the last two weeks. The chart looks like a breakout is imminent. If the S&P breaks out to new highs by more than a couple points, it should drag the Dow through 20,000 and that would be a double lift for market sentiment.

Over the last 11 presidential transitions, the S&P has averaged a -2.6% decline in the first 30 days. Since 1953, the S&P has averaged a 1.7% gain over the first 100 days. That suggests we should buy any dip.

The high close on the Nasdaq Composite is 5,574 and the index closed at 5,555 on Friday. The tech index could easily breakout to a new high at any time. The hurdle this week is the tech earnings on Thursday. So far, tech stocks have been beating estimates. With GOOGL, MSFT and INTC all reporting, we have a good possibility of a strongly positive open on Friday. Conversely, if a couple of those giants disappoint, Friday could be a bad day.

The FANG+A stocks (+Apple) have been positive but other than Netflix after earnings, they have not been strongly positive. Investors were waiting for the event risk to pass and for the earnings to appear. Netflix gained $10 after earnings and gave back $5 of that over the next two days.

The Russell 2000 has repeatedly broken below support at 1,355 and did not recover that level on Friday. Thursday was a five-week low close. I searched long and hard for some small cap stocks to buy this weekend. After looking at about 300 charts, only about 16 were playable and only 5 of those were longs and three had earnings over the next couple of weeks. Those are very bad ratios. There were easily 100+ that could have been shorted. I do not recall seeing so many bearish charts outside of a market correction.

This suggests there is more at play here than just the event risk fear. The small cap stocks rallied significantly after the election with 40% gains not uncommon. There has not been a decent retracement so they are all bleeding points one day at a time.

The weakness in the Russell is the fly in my soup this weekend. Couple that with the weakness in the Dow and it suggests any rally may struggle to gain traction. However, it is always possible investors will come back next week with dollar signs in their eyes and be buying everything they see in hopes Trump will be successful in reducing taxes and regulations.

The Russell 3000, the largest 3,000 stocks in the market, is showing a similar pattern to the S&P. The recent closes are at the top of the recent channel and it appears a breakout is imminent. The bullish picture will continue until the index breaks below support at 1,335. Until then, this is a continuation pattern.

You probably noticed that the MACD is negative on every chart. The internals are weak despite the nearness to the recent highs. Over the last several weeks, fewer and fewer stocks were supporting the market. If that continues next week, any potential rally could be in jeopardy.

The Volatility Index continues to warn that investors are too complacent. The index fell back to 11.50 on Friday and that is a warning sign everyone is moving to the same side of the boat and capsize danger is increasing. If everyone is long, there is nobody left to buy.

Will the real market please stand up? With two indexes bullish and two bearish, next week could see a conversion of sorts. Will the bears turn bullish or the bulls turn bearish? Inquiring minds want to know.

Enter passively and exit aggressively!

Jim Brown

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