The Dow 20,000 target was hit and investors are not showing as much interest in chasing prices higher.

The market is not declining but the momentum indicators are fading. That is only natural after a big run lasting over two months and a big round number target. That does not mean we are about to enter into a correction but there are signs the bullish sentiment is slowing.

The number of stocks setting new highs are starting to slow despite a positive advance/decline line. Again, I am not predicting a crash, I am just pointing out that the internals are fading.

With the major indexes setting new highs you would expect the number of stocks trading over their 200 day averages to be rising. That is not the case. The percentage of S&P stocks over their 200-day has stagnated at 68%. They have been at that level since late November and not rising. In other words, the breadth of the market is not improving.

The percentage of stocks over the shorter 50-day average has also plateaued and actually starting to decline. This should be a leading indicator for the longer-term 200-day average. The 50-day is more reactive and has declined from 82% to 69% since the first week of January despite the new market highs.

I think everyone will agree the Nasdaq big caps have been outperformers with the index continuing to make new highs. It would probably be a surprise to see that only 58% of the Nasdaq 100 stocks are above their short term 50-day average. This has declined from 72% in early January. This means fewer stocks are leading the charge and that means higher risk to future gains.

Along the same line of study, the bullish percent index has stagnated at 73% for the last month. This is a lower high from the April and August levels and suggests we could see some weakness as those stocks with less than stellar earnings began to lose supporters. There is nothing wrong with the BP index at this level but the lack of gains with the market making new highs is the troubling part of the picture.

You hear it all the time that the small caps lead the market. The advance/decline line on the S&P-600 Small Cap Index is weakening. When compared to the A/D line on the Dow there is a marked difference. This is a clear example of a few big cap stocks leading the market while the small caps are fading. Longer term, this cannot continue. Eventually the few big cap leaders will become so overextended they can no longer continue the climb and the weight of the much larger number of small caps stocks will pull the market lower.

I know all these charts suggest I am bearish. I am not outright bearish but the charts are suggesting the momentum is fading. We have come a long way without a material bout of profit taking and a 3% to 5% decline would be a wonderful opportunity for the market to recharge for a move to higher levels.

As I said in the market commentary this weekend, we need to follow the trend until it ends. Normally, there is weakness after the earnings cycle is over and just before the February options expiration. The last three months have been far from normal so there is no guarantee we will see that weakness in February. Just be prepared if it suddenly appears.

Enter passively and exit aggressively!

Jim Brown

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