All the major indexes closed at new highs on Wednesday. That was the only material gain except for the Nasdaq.

We had a one-day rally except for the tech indexes and they posted decent gains on two days. It is hard to find any real market momentum when the big cap indexes only posted one day of gains for the week.

Sentiment rose with the new highs dragging a lot of fence sitters off the sidelines. Volatility fell again to 24-year low levels. The VIX has closed under 10 for 7 consecutive days. That is scary but there is no reason it cannot continue.

The driving force in the market is the Q2-earnings cycle. We had a big week last week with more disappointments than expected. Next week is the busiest of the cycle with 190 S&P companies reporting plus more than 500 non-S&P companies.

The outlook for this week is positive after we get past Monday. Of course that all depends on the earnings reports. We saw last week what damage a few high profile companies can cause with a disappointing report.

The S&P punched through uptrend resistance on Wednesday and held the gains on Thursday. The minor 1-point decline on Friday was just noise. The S&P could be primed to push higher assuming there are no disasters when those five Dow stocks report on Tuesday morning.

The round number target is now 2,500 and I would be shocked if we broke through that level. I will be recommending SPY puts when we get close. The historical trend for Aug/Sep is too negative not to at least take out some insurance. If Tuesday morning produces a breakout, the next two days could accelerate it but it all depends on earnings. Friday is the day I will start to worry about market direction since most of the big cap stocks will have already reported.

The advance/decline line on the S&P is still in rocket mode and until we see a stumble there, the rally should continue.

The Dow remains a caution indicator but that is mostly because of its narrow 30 stock composition. We saw just 4-5 stocks cause a world of trouble last week. The index posted a nice gain on Wednesday but it was offset by four days of declines. The Dow remains the weakest link but those five stocks on Tuesday morning could cause it to rocket to new highs again if their reports are positive.

Note that the MACD has rolled over again. The MACD has not yet turned negative but is very close. If you look at the top of the chart over the last five weeks, there has been zero momentum. All the gains have come from the July 12th and 14th spikes. Everything else was sideways volatility. This chart may be technically bullish but I would not bet on it going higher. Everything depends on those five stocks on Tuesday morning.

The Nasdaq Composite is the market leader. The index posted 10 consecutive days of gains that ended on Friday with a miniscule decline of 2 points. The index should pause here as investors wait for Google to report earnings Monday after the close. There is some fear that they could disappoint again and the market reaction could be negative. When you are a $1,000 stock, everyone expects strong results to justify the high dollars. If it were a $100 stock with the same PE the expectations would not be so critical.

On Tuesday, Amgen and Biogen both report and they could push the index around. However, Biogen is in the morning and Amgen after the close so the reaction will be spread over two days.

The Nasdaq is facing new high resistance at 6,385 and round number resistance at 6,400. If I were betting, I would pick 6,500 as the potential pre August top. If GOOGL, FB and AMZN all report positive earnings surprises, we could be there by Friday.

The Russell 3000 continues to be the index to watch since those 3,000 stocks are market. The new highs on Wed/Thr and the minor 1-point decline on Friday suggest the rally will continue. This is a case of the troops leading the charge rather than a few big caps leading the market.

Remember this chart? I have shown this chart without modifications since early 2016. The target of 2,458 has been achieved and now we are waiting to see if the index can push to new highs or whether we will see a return to that 2,134 level as support. That 2,458 projection was made back in May 2016.

The FANG stocks have regrouped after widening their relative performance in June. They are all clustered at what could be called group resistance from late May. This could have a lot to do with Nasdaq direction after next week.

The Nasdaq sprinted ahead of the semiconductor sector over the last two weeks but the short term decline in the $SOX definitely dented the Nasdaq gain last week. If the chip stocks are going to weaken, that would be a massive weight on the tech sector.

Historically August and September are the two worst months of the year for the market. However, the market has been ignoring historical norms over the last several months. Will it ignore this trend as well?

While the indicators suggest the market will continue higher next week, we could be nearing a turning point. I would refrain from being overly long as the week draws to a close.

Enter passively and exit aggressively!

Jim Brown

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