Next week is the pregame warm-up event ahead of the real game starting on January 2nd.

The tax reform bill is now law and the government funding shutdown deadline was kicked out until January 19th. There is nothing standing in the way of future market gains other than investor actions.

The week between Christmas and New Years is typically mildly bullish. Since 1950 the S&P has gained an average of 1.3% over the next six days. The last six times the market was negative for those days, it was a bad omen.

That happened in 1994, 2000, 2005, 2008, 2015 and 2016. In 1994, 2005 and 2015 the market was flat in the following year. In 2000 and 2008 there were ugly bear markets and in 2016 there was a major correction of 269 S&P points in less than three weeks.

The market action leading up to this week was not bullish. The major averages set new highs last Monday but failed to follow through and posted declines the last four days. That hardly seems to be suggesting traders are bullish about next week.

With the 30%+ gains since the election and not even a 5% decline since January 2016, it makes sense that traders are concerned about a repeat of that 2016 crash.

If it comes it should be in early January. It should also be short, sharp and shallow. There is too much expectation for a ramp in earnings in 2018 because of the tax cuts. Investors could be mortgaging their kids to buy any January dip. This could be a once in a generation market event.

However, the wild card is the unknown about how much of the expectations have been pulled forward into 2017. The S&P is up +600 points since the election. That is an obscene gain in a single year at the end of a 9-year economic expansion. There will eventually be profit taking and without the lure of future earnings increases, it could have been very ugly.

So now we wait through the next four days of market action in hopes of a buying opportunity in January.

Our canary in the coalmine indicator for the health of the market, stumbled last week. The A/D line on the S&P made a new high on Monday but faded the rest of the week as the markets traded sideways. It is not yet material and this is where you have to take the market fundamentals and give them precedence over the technicals. The calendar is against us for next week. Continued lackluster moves will turn the charts further into negative territory in the short term but the long-term outlook will remain positive because of the tax benefits. The MACD turned barely negative but we have to ignore it this week.

The chart shows the same pause after the S&P stalled at 2,695 twice on Mon/Tue and then faded. The index is still close enough to hit 2,700 by the end of December if sentiment turns positive next week. Support remains 2,650.

The A/D on the Dow took the same stutter step with a minor decline but the MACD turned bearish. In theory, this could suggest a decline but the fundamentals will rule. This is just a calendar pause as investors wait for January.

The Dow failed at 24,850 for four consecutive days. The attempt to get to 25,000 before the end of December has been blunted significantly. The index is 246 points below that level and the tape is weak. It is still possible to reach that level if the historical 1.3% gain is front loaded into the next four days. I would not hold my breath but it is possible. The market could suddenly turn very bullish next week on the tax news and hit that 25K level.

The Nasdaq remains the weakest of the big cap indexes. The A/D chart is significantly different from the Dow and S&P because the biotechs and semiconductors have been trading erratically for the last several weeks.

The index did make a new high on Monday and traded briefly over 7,000 to reach its target for December. It was all downhill from there. The minor decline on Friday gives me some hope that the big cap techs are not going to fall off a cliff next week but once into January, all bets are off.

The Russell 2000 is still stuck under resistance at 1,550. However, there is a pattern of higher lows that suggests buyers are becoming slightly more aggressive but not yet bullish. If we could get a breakout over 1,550 on decent volume, it could energize the entire market. Small caps are supposed to lead and especially in December.

The high yield ETF is continuing to weaken and created a bearish cross over the S&P last week. The correlation declined from more than 90% two weeks ago to -.25%. This is a major warning signal for the market. The S&P typically follows the high yield market.

The semiconductor sector continues to be weak and it is exerting negative pressure on the Nasdaq. The index normally follows the $SOX and we have seen a large bearish cross over the last three weeks. If the SOX continues to be weak, the Nasdaq will eventually fail.

There is no magic chart I can show you to predict market action over the next two weeks. Next week "could" be flat to down but it could also regain its historically bullish trend. It is a coin toss. Once into January I remain concerned we could have a volatility event in the first couple of weeks but I would be a buyer of any dip. I am sure there will be a million other buyers as well so any dip could be short. However, the massive amount of uncaptured profits could produce a major portfolio restructuring event. We just will not know until it happens.

Enter passively and exit aggressively!

Jim Brown

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