The S&P and Nasdaq made new highs but it has been 9 days since the Dow high. The thin 30 stocks composition of the Dow means that large moves in only a couple stocks can overpower the index and cause divergence with the broader market. The Dow closed at a new high of 27,359 on July 15th and has not returned to that level because of big declines in several Dow stocks. We are also reaching the point where many Dow stocks have reported and are going into their post earnings depression phase. This is where investors close positions because the uncertainty is gone and the potential for a large move higher has passed. They move on to other stocks that have not yet reported. This is not a mass selloff in those Dow stocks but rather just a negative bias or a depression period.

This post earnings depression period ahead of the summer doldrums is weighing on sentiment. The weekly AAII Sentiment Survey showed a 4.2% decline in bullish sentiment and a 3.4% rise in bearish sentiment. Despite the impending Fed rate cut, investors are losing their bullish tendencies. All the good news, (rate cut) and the bad news (expected Q2 earnings of only 0.5%) is priced into the market. There is no excitement. We may see a bounce early in the week ahead of the Fed but there is a better chance of a decline in the days that follow the event.

The broad market A/D line for the S&P was choppy early in the week but improved as the week progressed. This is more than likely buying ahead of the normal "Fed drift" where the market normally rises on the Tuesday before a Fed decision regardless of the expectations. Investors are buying the rumor and will sell after the news.

The A/D line on the Dow has flatlined since the high on July 15th. Excitement has faded ahead of August, which is historically the worst month of the year.

On the positive side the small caps saw a sudden reversal of fortune. After more than two weeks of negative bias the sector suddenly ramped higher and the A/D line is at a three-month high.

The difference is clearly evident in the comparison between the Dow and Russell. The indexes are still a long way from being correlated or from the Russell leading the broader market. The recent rally was a large cap rally but at least last week the trend has begun to change. In normal markets the Russell is normally the leader

There was a dramatic change in the Semiconductor Index last week. The $SOX exploded higher and that helped lift the Nasdaq to a new high. Strong rebounds in Google and Netflix helped the FAANG stocks even though FB, AMZN and AAPL declined for the week. The gains in NFLX and Google helped support sentiment in the tech sector.

The Nasdaq surged on Wednesday to a new high and although there was a hiccup on Thursday the index managed to tack on another 91 points on Friday to close at another new high. Investors like to follow Nasdaq highs, and this could have a positive impact for next week. However, the Nasdaq is up 26% for the year and that could attract some significant profit taking in August.

The Bullish Percent chart is one I do not show that often. This is the percentage of S&P stocks that have a buy signal on a point and figure chart. Point and figure charts are used by many portfolio managers because the signals are slower and longer term. These charts take a lot of the noise out of the market movement.

For the percentage to decline is a strong indicator of weakening sentiment.

Another sentiment indicator is the percentage of S&P stocks over their 50-day average. The S&P is currently at 78%, down from 85% two weeks ago. This is another sign of weakening sentiment.

The Volatility Index ($VIX) is holding just over 12 and the long-term support lows. The VIX very rarely moves below 12 and this is evidence of complacency and the potential for a volatility event in our near future.

I am concerned about the arrival of August. While the summer rally could continue, all the technical indicators in the market are suggesting a change in direction. We are early in the trend and this could be just a pause to refresh before moving higher. However, the breadth of the indicators suggests investors are tired and the market could be suffering from exhaustion. The China trade negotiations are not going well and the global economy continues to decline. The US economy is losing momentum although still expanding. It is just the pace of the expansion that has slowed.

I would recommend being cautious over the next six weeks. There is always another day to trade if you have preserved your capital.

Enter passively and exit aggressively!

Jim Brown

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