Summer rallies are normally a surprise and this one is no different. The bulls are not just climbing a wall of worry but stampeding higher despite seasonal patterns. August and September are the two weakest months of the year. July is normally neutral with a fade at month end. The Dow, S&P, Russell 3000 and the Vanguard Total Market Index are all at new highs. The Nasdaq, Russell 2000 and NYSE Composite are well below historic levels. I do not recall in recent years when the major indexes were so separated by performance.

The bulls are ignoring earnings, economics, Fed policy, strong dollar, weakness in China, Brexit's impact on Europe, etc. Once the breakout appeared, the equity fund managers were forced to chase prices higher to avoid being left in the dust by their competitors. Now it is a race to capture as much performance as possible before the miracle rally runs out of steam.

The aborted coup attempt in Turkey caused S&P futures to decline -10 points after the close on Friday. That deficit has already been erased and the futures are up 5 points on Sunday evening. The Asian markets opened positive and we appear headed for another set of new highs on Monday. Obviously, that can be erased in a heartbeat on a negative headline but that is the outlook Sunday night.

The earnings cycle kicks into high gear this week and there are plenty of high profile earnings. The majority are expected to use the "Brexit ate my earnings" excuse for future guidance. How long the market remains in rally mode is going to be directly related to the quality of earnings this week. Those that have reported already have pushed the expected Q2 results to a decline of -5.5% for S&P earnings.

The S&P blew past resistance at 2,116 and 2,128 to close at 2,161 and is clearly overbought and in need of a decent bout of profit taking in order to provide an entry point for those currently waiting on the sidelines. Support on a decent dip would likely be the prior high at 2,130.

The Dow is also severely overbought with a close just over resistance at 18,516. The index is up nearly 1,500 points since the June 27th post Brexit low. That is an extreme sprint with only two days of negativity in the last thirteen trading days. Those declines were lackluster. However, the Dow has moved sideways at 18,500 for the last two days. The opening spike on Thursday took the index to 18,512 and it only gained an additional 4 points over the following two days. While it looks like we could open higher on Monday, there is a limit to the gains we can add without some profit taking.

The economic calendar is light and the early week focus will be on the Republican Convention and the potential for violence and confrontation. The most important economic report will be the Philly Fed Manufacturing Survey on Thursday.

I have been cautioning on being "overly long" in my Option Investor market commentaries. Unfortunately, the LEAPS portfolio is overly long and we are at risk for a major market decline. The current stop losses are suggestions and I would encourage readers to apply their own risk profiles and set your own stop losses. I have tried to leave a wide margin in case of market volatility. Being stopped out of long-term LEAP positions on a couple days of market volatility is a major frustration for me. However, after this coming week I plan on tightening them again because there is a limit to the amount of gains a market can make without a pause and seasonal weakness is just ahead.

Jim Brown

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