With President Trump having a successful trip overseas, the number of negative news headlines is shrinking.

Since the political headlines have been providing much of the market motivation over the last couple weeks, the lack of any additional negative headlines should be positive for the market. The Saudi Arabia trip was positive because of the massive arm sales agreements, the $40 billion commitment from Saudi Arabia for American infrastructure projects and the toned down rhetoric. So far, everything about the trip has been positive.

With Q1 earnings growth at more than 15% and forecasts for the rest of the year in double digits, investors should be celebrating. The earnings beat percentages were very high and guidance warnings were only 2:1 over positive guidance and that is also less than normal.

The U.S. economy is expected to rise 4.1% according to the Atlanta Fed GDP Now real time forecast. That has a couple dozen additional economic reports to weather befoe we actually get to the Q2 numbers but the outlook is good. Employment is excellent after getting by the weak spot in March.

By all the normal metrics, the markets should be rising. The headline drop on Wednesday was bought but not with any serious conviction. The market was moving up strongly on Friday until the last set of political headlines caused a sharp drop ahead of the close. We still finished positive but well off the highs.

The biggest immediate challenge is the MACD sell signal on the "best six months of the year" strategy. The strategy is decades old and capitalizes on the normally weak summer months and the stronger winter months by timing market entrances and exits. This is almost identical to the "sell in May and go away" strategy except investors do not sell on May 1st. They wait until the MACD sell signal that normally occurs around the middle of May. That sell signal came last week when the market declined.

Because of the strong earnings and current market optimism, we may not see any material decline this year. However, with economic optimism slipping because the president's problems, it could actually increase the selling given the recent rally. Investors have been reluctant to sell because they thought there would be a tax reform program passed. That has now slipped into 2018 according to lawmakers and given the midterm elections, it may not even happen in 2018. There is no reason to continue holding profitable positions in a weakening market if there is not going to be a change in taxes.

The S&P is struggling to recover its prior range with the 2,380 level returning as resistance and 2,350 now support. The rally bloom has faded but we do not have any new indications of direction either positive or negative. The last two days have just been just an oversold bounce that regained only half of the decline.

The Dow chart is similar with the Dow still 200 points below its pre crash levels. The low was 20,553 on Thursday so it has recovered just over 50% of its losses. Support is 20,600 and resistance 21,000. That is a wide range of possibilities for next week.

The Nasdaq rebound was also lackluster and the index failed to rebound to the intraday highs from Wednesday. The index declined -174 points and only recovered 86 of those points for less than half of the decline. The big cap techs had a knee jerk rebound on Thursday but Friday's gains were muted with afternoon declines. We may be seeing the early stages of some additional profit taking.

The small cap indexes had the weakest rebound. The Russell 2000 declined 43 points and only rebounded 15 points. The small caps may be weaker than the rest because of the Russell rebalance in mid June. Hedge funds are probably gaming the system and selling the stocks they expect to be removed from the index.

The earnings cycle is nearly over and there are only a few companies reporting this week. The number declines significantly the next week. Hewlett Packard and Costco are the ones to watch with Best Buy and Lowes the next most important.

The economic calendar is headlined by the FOMC minutes on Wednesday. Market volume will decline dramatically after the minutes as traders head out early for the holiday weekend. The two home sales reports are the next most important and both are expected to post declines.

I am expecting the market to try and rally this week, assuming there are no unexpected headlines. Whether it will be successful is another question. As I explained above earnings and economic optimism are strong. Whether that can sustain the market given the current political environment and the end of the Q1 earnings cycle is unknown. Since the market has avoided any material declines for months despite dozens of potential pitfalls, we have to bet that the trend will continue, until it fails.

Jim Brown

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