The VIX is holding around 12 as investors consolidate their holdings at market highs. Nearly every day recently the market posted early morning highs and then faded into the afternoon. The Nasdaq and Russell were both negative on Thursday afternoon until the tech sector added a couple points at the close. There is not enough volatility to spike the VIX because the overall market bias is slightly positive.

The VIX is based on calls and puts on the S&P. The lack of a volatility bounce suggests large investors are not worried enough about market direction to buy puts to protect their positions. This is called complacency.

Those biotech investors who grew complacent with the slow trend higher were met with a rude awakening last week. The Medicare for All proposal crashed the already declining sector and probably prevented the Nasdaq Composite from reaching a new high.

There are a large number of biotech stocks in the Nasdaq and the Russell and this could had been a significant drag on those indexes.

The chip sector continued to fly with another new high. This helped to offset the biotech drag on the Nasdaq. The resolution of the Apple/Qualcomm patent suits was a big relief for Qualcomm shares and for other Apple suppliers.

The semiconductor stocks have extended their lead over the Nasdaq because of the drag from biotechs and drug stocks. This could cause a problem in the future. The chip stocks need to rest and even this far away from the Nasdaq their weakness could be transmitted into the tech index. When the chips rest that is 25-30 stocks all resting at the same time. Eventually the chip and Nasdaq will move back into correlation and that could be painful.

The FANG stocks also contributed to offsetting the biotech plunge. Netflix was down early in the week but recovered to help the sector on Thursday. Facebook has traded sideways in a tight range between $176-$180 for the last two weeks. While it has not helped the Nasdaq at least it was not a drag.

Here is the challenge for the Nasdaq Composite. The index is up 29% since the December lows. That is more of a gain than we post in most years. It has been nearly vertical with only a handful of temporary pauses. We need a material dip to equalize the pressures. This is likely to happen during the summer doldrums. April is normally weak and we have not seen any material weakness other than late March. This means we are even more overdue than normal and increases the chance for a sell the news event at 8,109.

I wrote last week that we wanted to be careful and watch for the A/D line on the S&P to flatten out or to roll over and begin to decline. This is exactly what we saw. The A/D flattened. It can still go either way but after a long period in ascent mode, the most likely path is lower.

The small cap A/D has definitely stalled for the last two weeks and appears to be on the edge of a decline. The Russell chart looks the same. It is right on the verge of turning bearish. The small caps lead the market, and should they suddenly turn south the Nasdaq is likely to follow.

Even though the S&P is holding just over 2,900 the percentage of S&P stocks over their 50-day average has fallen 15% over the last two weeks from 85% to 70%. This is stealth weakness since the actual index is still holding its gains. This means the breadth is shrinking and fewer stocks are leading the market higher.

On the positive side the correlation between the High Yield ETF (HYG) and the S&P has returned to almost 100%. Note in 2018 how the two diverged but in 2019, once the Fed said they were going to hold off on rate hikes, the correlation has been nearly 100%. This means as long as the HYG is rising, the S&P is likely to follow.

The most visible resistance of any chart is the potential H&S on the Dow. The index needs to blow through that prior high at 26,828 in order to negate the current resistance. On a weekly basis the indicators are all strongly positive, but we are not in a weekly world today. We are living day to day with the headlines and earnings.

I recommend caution until we see a solid breakout on decent volume with short covering and price chasing. The market is too calm today and the bears are able to blunt every spike with relative ease. We need a catalyst to appear to break through that resistance. Be patient until a breakout appears.

Enter passively and exit aggressively!

Jim Brown

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