If at first you don't succeed, try, try again. While the S&P and Nasdaq have made hew highs, they have failed at producing a real breakout. Every minor peek above the prior high is met with heavy selling. Volume on down days is 1.5 billion shares more than the average on the up days. Investors do not seem to be too worried about the lack of progress because they are buying the dips with strong internals.

The A/D ratio on the S&P was 412:82 in favor of decliners on Wednesday. The ratio on Friday was 410:81 in favor of advancers. I am not making this up. The almost exact reversal of market breadth is showing the investor uncertainty in the current market. Investors are standing aside when a downdraft appears. When it fails to continue, they are jumping into the dip and the index rebounds to the prior level.

As I have said in past weeks there is no conviction on either side. The Dow lost 38 points for the week after losing 16 points the prior week. The index has failed to make any real gains for two weeks despite the new highs on the S&P and Nasdaq.

The S&P gained 6 points for the week and missed a new high by a quarter of a point. That is hardly bullish since there is a serious lack of excitement at the highs. However, given the strongly positive A/D ratio it is not bearish either. There is just no conviction.

The S&P A/D line made a new high bit note the MACD which turned negative two weeks ago. The pace of advancers has slowed overall despite the strong showing on Friday. Note the strong moves in the A/D line back in Jan/Feb and late April and the small jerky movements over the last two weeks. The market is struggling to hold on to the current highs.

The small caps managed a sharp move on Friday with a 10:1 A/D ratio to a new A/D high. The small cap stocks have been laggards and they should be leading. However, summer is not kind to these stocks and any gains in May are likely to be erased in July.

The A/D line on the Nasdaq has also been choppy. A couple strong days are followed by a couple weak days then then the pattern repeats. Amazon was a strong motive force to the upside but Google was a huge anchor after earnings. It was amazing that the Nasdaq indexes both closed at record highs on Friday.

The Nasdaq Composite has moved above the prior high at 8,109 multiple times over the last two weeks but every time it was knocked back. Note the length of the intraday moved compared to the two weeks prior when the index was moving forward. This is a picture of investor uncertainty. The Friday close at a new high even if only by a couple points, is positive. If we could get the Nasdaq and S&P to bust out on Monday and add 20-30 points and hold it, market sentiment would receive a huge boost.

The S&P has the same long bars at the top over the last two weeks. There is not enough conviction on either side to make a directional move. However, at this point the bulls would appear to have the advantage because of the strong close on Friday.

The Dow remains trapped in the H&S formation at 26,616 and could be the anchor for any future gains. Note the indicators on the bottom. All three are bearish.

The market volatility is relatively stable in the 12-14 range although there was a spike to 15+ last week. The -138 point downdraft in Google upset the entire market and tech stocks all took a temporary dive, which provided the volatility boost.

While the markets are stalled at the highs there are some positives. All the major earnings are over, and we are not likely to have another Google type event. The rest of the earnings disappointments are not going to move the market with the same force. If we can move over the current levels on the S&P and Nasdaq and do it with any conviction, we could see a new leg higher very quickly. However, if those indexes are continually knocked back on every attempt, it will not take long before investor get the message and begin moving to the sidelines. The China trade talks are the wild card for this week.

Enter passively and exit aggressively!

Jim Brown

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