The broad market indexes posted minimal gains last week despite the post Fed bounce.

The Dow gained only 11 points for the week and the S&P-500 gained only 5 points. Despite the lackluster performance, there are no real signs of negativity. The market internals are steady and the oscillators on the weakest section of the market reversed higher. Unfortunately, the oscillators on the big caps are still pointing lower but there is some bullish divergence between those oscillators and the actual price.

The prior week saw the indexes touch multi-week lows. It was not a big drop and in each case, support held. We should be encouraged since many analysts and traders have been looking for a material decline.

I said there was a lack of negativity. That is not exactly true on the Dow chart but I will back up my claim later in this commentary. The Dow chart remains the weakest of the big cap indexes. The decline to support at 20,800 held but was penetrated on both days only to rebound back above that level at the close. That is ok. It is the close that counts. However, the lackluster performance for the week and the lack of a material rebound from that support suggests the Dow is still at risk for at least a temporary dip. The MACD and the RSI are both in full decline but these are somewhat lagging indicators since they are using the recent history as source data.

The S&P chart is slightly better than the Dow with a decent rebound from support and the uptrend support has not been breached. That test could come this week. The RSI is neutral and the MACD has turned slightly negative. Again, that is a lagging indicator.

The Nasdaq Composite consolidated for three weeks and burned off all the overbought conditions and is now threatening to breakout to a new high. The prior high was 5,904 on March 1st and the index has closed at 5,899 for the last three days. There is a major battle underway at that 5,900 level. If the Nasdaq is successful in breakout out to a new high it will help change the sentiment for the entire market. The MACD is about to turn positive again after that consolidation period saw it turn negative.

The most positive development in the market was the reversal of the small cap indexes. The S&P-600 tested initial support at 825 three times and finally rebounded strongly. The index along with the Russell 2000 has now been up for three consecutive days. They were up sharply on Friday when the big cap indexes were lower.

If the small caps can continue their rebound and the Nasdaq Composite breakout to a new high, the Dow and S&P should also turn around and follow them higher.

To prove my case on the lack of negativity I am going to go rapid fire through a bunch of charts without a lot of explanation. They should be obvious and while there has been some deterioration at the very tops this is normal market fluctuation.

The bullish percent index on the S&P is still at 76.6% and that is very bullish and only about 3% below the highs from April and February. No negativity here.

The percent of S&P-500 stocks over their 200-day average actually rose last week to 80%. That is only down about 4% from March 1st and 2% from the prior high in August. A market with 80% of the stocks over their long-term average and rising is a bullish market.

The market weakness the prior week caused a slight decline in the percentage of stocks over their short-term 50-day average but at 69% that is still just below the levels seen since the initial post election bounce.

The cumulative advance/decline line on the Nasdaq is rising sharply after a sharp drop in early March. The tech stocks are alive and well. The small cap A/D line is also rising. If you combine the Russell 2000 and the Nasdaq Composite and eliminate the duplicates, you are going to have more than 3,000 stocks with a short-term positive trend.

I defy you to look at the A/D chart for the S&P and tell me that is a negative trend. We saw a minor hiccup the prior week ahead of the Fed and then a rebound last week. Given the February rally, we should have seen a pause.

The semiconductor sector always leads the Nasdaq. Jeff Bailey used to call the $SOX the head of the snake. Wherever the $SOX went the Nasdaq followed. With the Apple upgrade cycle ahead, the chip stocks are in rally mode with the Semiconductor Index setting new highs.

The Dow is the weakest index because of its narrow composition. If one sector is down, there will be a pull on the Dow. On a day when oil is up and financials are catching a bid, the index will be up strongly. A one-point gain/loss in an individual stock is equal to about 7 Dow points. No other index has that much reliance on any one stock or group of stocks.

While the charts listed above suggest the underlying market is still healthy, we have gone a long time without a material decline. The S&P has now gone 108 days without a 1% decline. That is the 9th longest streak since 1950. Nothing says the streak has to end soon but we should always be ready.

There are a large percentage of traders that expect a decline. The AAII Sentiment Survey for last week showed nearly 70% of respondents do not believe the market is going higher. On a contrarian basis that is bullish because it means they are either out of the market or betting against it. Any sharp uptick could cause short covering and price chasing from those that do not want to be left out.

If a dip were to appear, I believe it would be buyable. However, the turmoil in Washington appears to be pushing the tax reform plan farther into the future and should that become common knowledge, Citigroup said we could see a 10% decline. For that reason, I would expect the administration to try and create some additional tax cut headlines to keep the market on track.

Lastly, markets do not need a reason to decline. They are a living entity with a mind of their own, driven by the whims of millions of investors. If a particular headline were to sour investor sentiment, the tide could turn. Also, the next three weeks will see investors pulling money out of the market to pay their taxes. In some years when profits have been large, that can be a material drag.

Enter passively and exit aggressively!

Jim Brown

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