The market continues to climb the wall of worry and refuses to pause for profit taking. While the Dow and S&P continue to move sideways or even slightly lower the broader averages like the Russell 2000 or the Vanguard Total Market Index (VTI) both closed at record highs on Friday. The Nasdaq is moving steadily higher and the Amazon, Google and Apple earnings last week helped push it to close over strong resistance at 5,160. The index is still below the record high at 5,218 but is moving closer every day. The Russell 2000 is also creeping higher although very slowly.

Traders tend to focus on the Dow and S&P and because of their limited constituency of 30 and 500 stocks they tend to move based on the results of only a few megacap stocks. The Dow has actually declined 84 points over the last two weeks week and closed near three-week lows. The Dow has critical support at 18,400 and closed at 18,432.

Meanwhile the S&P has moved sideways but did manage to close the month near the high for the month at 2,175. The S&P benefitted from month end fund flows where portfolio managers put retirement contributions to work on the last day of the month. That normally carries over to the first day of the next month.

The Russell 3000, is the largest 3,000 stocks in the market and represents the actual market as a whole rather than some smaller subset defined by sector or market cap. The R3K closed at a new high on Friday but like the other indexes it has been trading in a very narrow range for the last three weeks. The only difference is that the R3K has been trending slowly higher.

Here is the surprise we have been waiting for. We need a catalyst to beak us out of the tight ranges. On Friday after the close the stress test results for the top 51 European banks were released and they were not as bad as expected. This is a positive for the markets on Monday.

In addition the Chinese Purchasing Managers Index (PMI) dropped unexpectedly to 49.9 for July compared to a reading of 50 in June and estimates for 50. That would normally send the markets lower but a private survey of small to medium sized companies showed a sharp expansion in activity with a jump from 48.6 to 50.6 for July. The Asian markets rallied and the S&P futures are up +12 as I type this.

If the futures were to hold into the open, that large of a spike would cause the indexes to break well above their recent ranges and could cause some serious short covering. That could be the catalyst we need to break the log jam.

The economic calendar for the U.S. has the national ISM Manufacturing Index on Monday and a positive print there could ease recession fears. Later in the week, we will get the payroll numbers and we need to see something in the 180,000-200,000 range to keep the positive momentum intact.

The earnings calendar is full but the number and quality of earnings will begin to fade since last week was the peak of the Q2 earnings cycle. There are still some large companies to report but none have the following and market moving potential as Apple, Amazon and Google. These reports are still important but very few of them will actually move the market needle higher.

While the S&P futures are up strongly we know that can change in a matter of minutes and move just as far in the opposite direction. Our portfolio is positioned for continued market gains and should those gains not come to pass we are going to be stopped out of a lot of positions. I raised the stop losses on most of the positions to protect profits. If we do get a decent market correction that will allow us to reload with 2018 LEAPS and exit the existing 2017 positions. We are moving into the seasonally weak August/September period so anything is possible.

Jim Brown

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