The Dow spent the week trading between 18,470 and 18,622. That was a very narrow 152-point range for the entire week. They rally is definitely losing traction BUT there is very little selling. Even with that tight range the advancers maintained a solid 2:1 advantage over decliners.

This could be a consolidation in place or buyers are having second thoughts about putting a lot of money to work ahead of the seasonal weakness in Aug/Sep.

It does not appear to be a distribution phase. The volume is too low at an average of only 5.9 billion shares. A distribution phase normally has high volume as large holders sell their shares into a rally at or near the top. With the low volume any large sellers would be able to move this market.

Getting to this point has been a defensive move by fund managers. With the market going higher they are forced to buy stocks to keep up with their benchmarks and their competitors. However, should the market roll over in August they could be just as quick to lock in profits. Managers normally time their buys to coincide with the market lows in September and October. They have been sitting on levels of cash at 5.8% that has not been seen since 2001. They have cash to continue buying if the market goes up but most would rather keep their powder dry until that September/October low.

This is the busiest week for Q2 earnings with more than 175 S&P stocks reporting and 12 Dow components. Thursday is the busiest day of the cycle. This means by next weekend more than 60% of the S&P will have reported earnings and the vast majority of the bigger companies. The quality and quantity of earnings will decline beginning the following week. That makes this Thursday an inflection point for fund managers. This is where they will have to decide if they want to continue nibbling at stocks or pull back and let the weakness begin. It will be a standoff between those with nerves of steel and those afraid of constantly buying higher highs.

There are also multiple economic events this week that could pour some cold water on the market's gains. The Fed announcement on Wednesday could turn hawkish and kill bullish market sentiment. The Bank of Japan could fail to implement more stimulus and the Asian markets would decline. The stress tests for the 50 biggest EU banks could be ugly. We already know the Italian banks will fail and potentially another dozen or so are at risk. In Italy more than 20% of loans are already nonperforming.

Any of those events or all of them could weigh on the market.

Note the consolidation cluster at the top right of the chart where the Dow has failed to make a material move for the entire week. This is a warning flag that the index may have reached its limits without a pause for some decent profit taking and to let the various global events run their course.

The S&P is a broader index and it did close 2 points over the prior high on Friday after rebounding nearly 10 points from the Thursday decline. It is still in nosebleed territory after that monster post Brexit spike. There has not been any material profit taking since that Brexit event. The consensus estimate for the yearend target on the S&P is 2,175 and exactly where it closed on Friday. Since we are still five months from year-end, anything is possible and we could move higher before the late summer weakness. Bank of America is expecting a 15% decline in Aug/Sep but that does not mean it will actually happen. We just need to be careful about being overly long with the indexes are struggling for air.

There are a lot of high profile tech earnings this week from companies like Amazon, Facebook, Google and of course Apple. Any of those companies could post disappointing results and kill market sentiment. Apple would be the most likely suspect. Once this week of earnings is over there is not much left for investors to watch as the cycle winds down.

I would continue to caution about being overly long and suggest you reevaluate your positions and stop losses. Seasonal weakness is routine but not guaranteed. With everyone expecting a decline in August there is a strong potential for another short squeeze.

Jim Brown

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