Summer volume has already arrived and that makes any rally attempt more difficult. Volume on Monday was only 6.5 billion shares and it declined all week to Friday's low of 5.7 billion. Welcome to summer Fridays. The major indexes suffered only minor losses, but decliners were 2:1 over advancers. There was definitely a move in motion to lighten up before the weekend and the FOMC announcement on Wednesday.

Trying to construct a picture of the market after last week is rather difficult. Traders were simply consolidating positions after the prior week's gains and not adding new ones ahead of the FOMC. I am sure there were a few traders closing up shop for the summer. Nobody wants to have a lot of long positions while they are playing at the beach or kicking back on a cruise with the family. I went on a vacation once with a boatload of long positions and it was the most expensive vacation I have ever taken. The market crashed while my attention was elsewhere, and it was very painful. Almost every long-time investor has had similar experiences and that is why volume is anemic over the summer.

We should not be making plans this weekend for new positions next week. The Fed and the G20 are seriously dangerous events followed by the equivalent of a four-day weekend. The next three weeks could be very volatile.

Despite the lackluster week the overall A/D line was positive. Friday's 2:1 negativity barely even dented the line, which is holding at the highs. As long as this chart continues to trend higher, the major indexes will post gains.

The small caps did not fare as well. The week was positive, but they are still struggling. As I have said before this could be our Achille's Heel and be the sector that drags the market lower. The small caps should do better despite the Chinese tariff issues because they are domestically focused. However, the geopolitical uncertainty and the weaker economics over the last couple months are a sentiment drag on small caps. Fund managers do not want to put a lot of money in small cap stocks because they cannot extract it easily in times of market stress. Small caps do better in late Q3 and Q4.

The correlation chart for the Dow and Russell clearly shows the divergence.

The Nasdaq A/D looks like the small cap chart. There was positive motion, but it was choppy. The crash in the chip sector and attack on the social stocks is weighing on the techs in general.

Small caps lead big caps and chips lead the Nasdaq. The Broadcom disaster on Friday definitely blunted the Nasdaq rebound and theoretically the Nasdaq should follow the chips lower. The saving grace here is the flurry of analyst comments that the Broadcom drop was overdone and could be a buying opportunity. I saw a couple of analysts recommending Micron saying the worst was already factored into the stock. Nasdaq futures are up slightly on Sunday evening so possibly there will be some chip buyers picking over the corpses in the sector.

Google, Apple and Facebook recovered significantly over the last two weeks but remain depressed. Facebook was the biggest big cap Nasdaq gainer on Friday. We need Google to recover and trade in the same direction of the rest of the FANG stocks.

The weakness in the indexes covered up what was happening under the covers. The percentage of stocks on the S&P with a buy signal on a Point and Figure chart rose to 62%. That is a three-week high and it occurred in a choppy range bound market.

The high yield ETF (HYG) is rising again and almost a three-year high. When this ETF rises, the market also rises. The current correlation is right at 75% and this suggests the S&P is not going lower unless it is headline driven.

With the exception of grains that have been delayed by flood waters the commodity index continues to move lower. Commodity prices have declined more than 63% since the high just before the 2008 financial crisis.

There has not been a recession since 1970 without oil prices doubling in the prior year. Oil prices are headed lower, not higher, unless there is a war with Iran. That means there is no recession in sight. As oil drops back into the $40s this fall this will be a drag on inflation and keep the Fed on the sidelines.

The critical resistance point for the market next week will be Dow 26,191. This has been trouble in the past and again last week.

The VIX remains stubbornly over 15 but closed at a three-week low. Once past the Fed meeting it should decline as long as the Fed remains dovish. Once past the G20 meeting it should retest the lows IF the Trump/Xi meet is a success.

I would recommend avoiding being overlong until after the G20. The market is not likely to race higher until that meeting passes. That does not mean we are not going to see some positive days but there is too much danger from the Fed and G20 to see a major breakout. Be patient.

Enter passively and exit aggressively!

Jim Brown

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