It has only taken four months for the markets to recover from their Q4 slump, but it seems like forever. After weeks of inchworm progress of two steps forward, one step back, the S&P and Nasdaq both closed at new record highs. If you blinked you missed it because the gains were minimal. The S&P only closed 9 points over the September high and volume was light. The index had an out of character spike on Tuesday to close 3 points in record territory then held those gains for the rest of the week.

The most favorable technical to support a positive change in sentiment is still the A/D line. The S&P saw a 3:1 ratio of advancers to decliners on Friday even though volume was a lackluster 6.4 billion shares.

I know readers are getting tired of looking at this chart but as long as this vertical ramp continues the market is going higher. Unfortunately, nothing continues on the same path forever. This is already the longest ramp in years, and it will eventually end.

Note that the MACD has flattened and is beginning to decline. I am not trying to call a top here, but this is the chart that will determine a top. When market breadth reverses it could be an ugly few weeks.

Ironically, the Nasdaq has been leading the market higher but the same chart on the Nasdaq is far less bullish. That is because it is the big caps in the lead and a some of the troops are not following. Twice last week the A/D was strongly positive but the other days the decliners won. There is still a lot of uncertainty regarding this rally.

In theory there is room for the Nasdaq breadth to improve now that both Nasdaq indexes are at record highs. Retail investors normally flock to new market highs like ants to a picnic.

The A/D for the small caps actually improved last week and closed at a new high. This marks a significant change for the sector and suggests portfolio managers are not as worried about a decline as they were in the prior weeks. If the Russell can break through that resistance at 1,600 this small cap breadth could improve rapidly.

The Semiconductor Index is up 34% for the year and that is after a significant drop last week. The $SOX declined 79 points or 5% in only two days. The chips lead the Nasdaq and after setting new highs they had a rocky couple of days.

Xilinx (XLNX) fell more than 30 points in two days and that coupled with the Intel decline was a big hit for the $SOX. It is amazing that the tech index shook off the chip-wreck and closed at a new high.

We have plenty of room for the Nasdaq and the $SOX to come back into convergence. The 2019 chip rally widened the gap when Facebook and Google were sagging on regulatory concerns and holding the Nasdaq back.

The FANG rebound last week lifted the Nasdaq despite the chip collapse. All the FANG stocks are back into almost perfect correlation. Netflix is the laggard.

The Dow has been struggling with the near daily implosion of one or more of its components. The Russell 2000 has been improving. This has allowed the Russell to move back into convergence with the Dow. The small caps are supposed to lead but have been laggards since mid-March. We have the potential for that to change if the Russell can break over 1,600.

The Russell is approaching that critical resistance but once through the next test resistance is well above at 1,707. That could be a nice move if investors suddenly turned bullish. I am not expecting it but this is always possible.

The Dow has been severely handicapped by a large number of earnings disappointments that have erased about 500 Dow points. Without those earnings losses the index could be retesting that 27,000 level once again. The high close is 26,828 and the intraday high 26,951.

Despite the new highs, the market has shown some daily instability. The VIX set a 6-month intraday low two weeks ago but the market uncertainty has kept it elevated over the last week. You rarely see an elevated VIX when the market is closing t new highs.

The broader market is overextended but there is plenty of cash on the sidelines. The intraday volatility has been bought but it still exists. The market breadth is positive and that is the biggest technical indicator suggesting we could see higher highs. When that breadth begins to fade, we should move to the sidelines and look to buy a decent dip.

Enter passively and exit aggressively!

Jim Brown

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