With the budget crisis postponed for a week and the runoff for the French elections next Sunday, this week would be a do over for our prior week.

The week of April 17th to the 21st was lackluster with the S&P hitting a two-month low at 2,330 and the Dow falling to 20,400. Last week those results were completely reversed with two days of short covering that lifted the indexes to their recent highs. The coming week could be less than enthusiastic given all the headlines on the calendar but we can always hope for a repeat of last Monday if Macron wins the runoff in France.

Le Pen is gaining on Macron and she joined forces with a prior right wing candidate that received 4.7% of the vote in the primary election. This could help increase her acceleration and bring her closer to the leader. If the polls are within 2-3% of each other by Friday, we can expect another market swoon on the possibility of a disruptor winning the election. If Macron pulls out the victory we could see another short squeeze. If Le Pen happens to win, we could see a massive dip as the European markets collapse.

The budget fiasco is in full swing with the House/Senate sending a bill to the president for a one-week extension in government funding. The new deadline for a government shutdown is midnight next Friday. If we get to Thr/Fri and there is no agreement and headlines are heating up, I would expect the market to fade into the shutdown potential. However, just as I was typing that last sentence, I received a news alert that lawmakers have agreed to a compromise to fund the government through September. Futures spiked from -2 to +2 so apparently others received the same news. This would be market positive for Monday if it is true. Right now, it is an unconfirmed "senior staffer" rumor.

This is also a Fed meeting week. They are not expected to hike rates but they could disclose more details on how they plan to unwind the $4.5 trillion Fed balance sheet. This could be more destructive to the market than a rate hike.

The payroll numbers on Friday will be anti climatic since the Fed meeting will be over. This puts less importance on the actual number but we still need to see some decent growth.

The various economic reports during the week are not normally market movers by themselves but taken together we could see some direction. The Citigroup Surprise Index has been falling sharply the last couple weeks because of headline misses on numerous economic reports. If that continues it could cause a decline in equities and further buying in bonds.

The earnings calendar is busy but the size of companies reporting has decreased. There are more than 120 S&P companies reporting this week after 194 last week. The highlights are Apple, Facebook, Tesla and Activision.

The S&P spiked to resistance at 2,388 on Tuesday and held there the rest of the week until a closing fade on Friday. That resistance level is solid and we may need a material catalyst to punch through to new highs. I see nothing on the horizon to be that catalyst. Just getting through 2,388 still leaves the round number problem at 2,400. With earnings peaking and the sell in May cycle starting this week, the path of least resistance is down unless we get a headline bounce.

The Dow had the same problem with 21,000 as the S&P did with 2,388. This resistance is solid and the Dow is very extended after the short squeeze early in the week. In theory, the Dow should retrace some of the gains before making a new run at a new high. Theory never seems to work in practice because of random headlines that void a technical argument. If we do see a decline, the prior resistance at 20,750 would be a good place for a rebound.

The Nasdaq is the market beast. Both Nasdaq indexes made new highs last week and neither showed any material indications of a potential decline. Both are unsupported and both are nearing long-term uptrend resistance. There will be another bout of profit taking sometime this year. I hope I do not run out of patience before it happens. Once Apple and Facebook report, all the big cap tech stocks will be done and post earnings depression "should" appear. I fully expect those short squeeze gaps to be filled.

The small caps reversed some strong gains on Friday. After being up 75 points over the last 8 days the Russell fell -1.2% on Friday. Hopefully this was just a profit taking blip rather than the start of a new leg lower.

I would continue to be cautious until we have a decent bout of profit taking. Call me crazy but I am seeing the potential for a double top on the Dow and S&P charts. Obviously, it is not a double top until suddenly it is. That could be the perfect start of the sell in May cycle and the summer doldrums.

With the market optimism at extreme levels, we could just continue higher. I think it would be a fight for every point but the Nasdaq just showed it how it is done.

Keep some cash on hand in case a buying opportunity appears.

Jim Brown

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