The Nasdaq and S&P closed at 5-month highs as money poured into big cap tech stocks. Despite the new highs it was a reluctant rally. Breadth was minimal and the gains were led by only a few stocks. Across the entire market advancers only had a 5:3 advantage over decliners. The Nasdaq gains were led by chip stocks with the Semiconductor Index rising 100 points in a week to close at a 6-month high. Broadcom helped lead the charge with an 8% gain on Friday. Note that the Nasdaq and $SOX were in lock step at the close on Friday, but the Nasdaq was ahead earlier in the week. The decline in Facebook and Adobe caused the Nasdaq to slow its gains on Friday.

Much of the Nasdaq's gains came from Apple and Amazon. Apple, the black line on the chart, had been trading sideways for five weeks. Shares exploded higher last week and that lifted the Nasdaq from its decline the prior Friday.

On the FANG chart, Amazon had been the nonperformer since early February, but it finally turned positive as Facebook and Google turned negative. Netflix in pink continues to hold its recent gains.

The decline in the Nasdaq A/D line the prior week was material. It was deep enough that the strong gains last week did not recover the prior strength. The A/D was only 3:2 positive on Friday despite the decent gain. This was led by a very few stocks with a few troops following along. Out of the 3,116 stocks on the Nasdaq 1,198 were negative on Friday.

The Nasdaq was the market leader despite the weak breadth. The five-month high close puts the index above all the material resistance until it moves well over 8,000. There is some congestive resistance, but it should not be material.

The A/D on the S&P was 2:1 positive on Friday and the A/D line broke out to a new high. There were 320 advancers and 169 decliners. It was far from a bullish market, but it was nicely positive. I am sure a lot of the breadth issues were related to the S&P rebalance at the close.

Strangely, the percentage of S&P stocks over their 50-day average declined by more than 10%. This was due to the week of profit taking compared to a rising average. The 3% dip in the S&P the prior week put many stocks with larger declines back below their short-term average. With the averages rising from the 10-weeks of gains, it will be tough for this percentage to return to the highs.

With the resistance at 2,815 broken the next major target is the historic high at 2,930. It is almost clear sailing to that level if we can avoid a headline disaster.

The Volatility index has also declined to 5-month lows and just over 12. The support from last September is around 11.75. The VIX can go lower but typically when we dip under 12 investors begin to get cautious. When the Vix is low it is time to go. When the Vix is high, it is time to buy.

The confirmation of the market direction comes from the Russell 3000. This is the 3,000 largest, tradable stocks in the market. This IS the market. Everything else is noise. The R3K closed over final resistance and the next target should be the historic high at 1,738.

I get concerned when everything appears to be lining up for a run to new highs. The distance on the major indexes suggests about three weeks at the current rate of advance. We know the odds of another three-week rally are slim but still possible. There is more than likely another bout of profit taking somewhere in the middle. Let's call it four weeks and that puts us right at April option expiration and income Tax Day.

April can be volatile because of selling to pay taxes. Normally it is more volatile if the prior year saw big gains. There are more taxes to pay so more selling is required. Last year there were no big gains. May to September were up but Jan-Apr and Oct-Dec were down. That suggests maybe April will not be especially volatile this year.

I am positive for the next couple weeks, but I am worried about the potential for a head and shoulders or double top formation. With earnings and economics weak, we are at increased risk for a negative headline to push us off the cliff.

Enter passively and exit aggressively!

Jim Brown

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