Pulling the health care bill and cancelling the vote on Friday was a disaster if you believe all the weekend headlines. The main stream media is pounding on the Trump agenda claiming it will be an uphill battle to get even the slightest tasks accomplished. That may or may not be true but the market is taking no chances.

The weekend headlines caused the S&P futures to open down -19 points and they are holding at -18 as I type this commentary. The post election rally has been built on expectations for tax cuts and deregulation and now that the health care bill has died, the political commentators are suggesting that tax cuts are also dead on arrival. The democrats have been dead set on blocking any Trump legislation and the health care win emboldened them and discouraged the various republican factions. When Trump and Ryan could not even get all the republicans to agree on their main goal for the last seven years of repealing Obamacare, their hopes of agreeing a huge tax cut just dropped significantly.

Investors are frustrated and seeing months of political fighting and maneuvering that may only succeed in getting a token tax cut, if they can get a cut at all. While every republican would like to cut taxes, that means there will have to be spending cuts as well. Several republican factions in the house will fight to their dying breath to avoid spending cuts on their favorite areas. Getting them to all agree on a major tax bill is going to be nearly impossible. Trump is going to be lobbying to get some democrats to join the plan to offset the stray republican no votes. That is going to be a tough battle because the democrats in the House and Senate are sticking together like super glue to block the agenda.

Institutional investors see the writing on the wall and they may be racing to the exits next week. Even after the vote was cancelled at 3:30 on Friday, there was still $2.4 billion in sell on close orders on the NYSE. Market sentiment is about to change significantly.

In the smoothed chart of the S&P below, the intraday low on Friday was right below the intraday lows from mid February, which is currently support. If the futures hold overnight the S&P is going to open in the 2,325 range and significantly below that last ditch support. That will be a clear sell signal and the likely target will be 2,250 because there is no material support until that level.

The Dow chart is similar with current support at 20,525 and the Dow should open in the 20,470 range if the Dow futures, currently -121, hold at that level until the open. That is a serious break of support with nothing but air until it drops back below 20,000. The target on a material decline would be in the 19,750 range. If that were to break we would be in a world of trouble with 18,000 the next support level.

The Nasdaq Composite has held above support at 5,800 but the Nasdaq futures are down -42 points, suggesting a dip to about 5,785 if they hold overnight. That is not a material break and the Nasdaq big caps are going to be the strongest stocks in a weak market if their recent patterns hold. That suggests the Nasdaq could try and hold that 5,800 level as dip buyers rush in on the first drop.

The Composite index has support about every 200 points if we are really headed to lower levels. The first would be about 5,600 followed by stronger support at 5,400.

The small cap S&P-600 broke support at 820 to a new low last week but rebounded slightly to squeeze back above that level. With the small cap futures down -14 it would suggest an open in the 812 range and a new low. Note all the white space on the chart until we reach the November lows. That is about 100 points on the S&P-600. If the market really takes a dive, it could be brutal.

The calendar for next week is mostly Fed speakers with the Richmond Fed Manufacturing Survey the most important economic report. Nobody is going to be watching economics the first couple days. They are going to be watching the Washington headlines and the impact on the market.

You know how the futures can react to headlines. All of this negativity could be erased by morning and the bulls be back in charge. However, this time may actually be different. We have had every minor dip bought since the election and the health care debacle was a wakeup call to the optimists. Promising is easy, governing is hard. The legislative process is a quagmire of special interest, pet projects and power hungry politicians. Their only goal is to win reelection rather than actually accomplish something long lasting.

There are 435 members in the House of Representatives. Each one has a completely different demographic in his/her district and what is important for one district is completely opposite of another. Getting a majority to agree on anything is a major task and with Trump on the ropes, quite a few will not be so eager to follow him into a battle that may be a tough sell back home.

The market is finally waking up to the fact that governing is hard and it is time consuming. Promising a corporate tax rate of 15% is a lot easier than actually getting a bill passed in the House and then survive in the Senate where the margins are a lot slimmer.

This week could be the end of the post election rally. We want to buy the dip but only after it has bottomed. Hopefully we will not lose too many current positions on the way to that bottom.

I said last week I was inclined to remove the stop losses ahead of a material dip because I expected the market to end the year higher. I am less inclined this week because of the potential change in sentiment. Most of our stop losses are already wide. I will monitor the impact on Monday and if we need to change something, I will send out another email.

Jim Brown

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