With the market holding at recent highs, will the normal seasonal shift apply?

August and September are typically the two worst months of the year for the stock market. However, the market has not been following normal historical trends. Eventually it will revert to normal. Is the normal late summer weakness the trend that will be followed this year?

The major indexes are just a few points under their recent highs. Three of the FAANG stocks are reporting earnings this week along with 190 S&P companies and 9 more Dow components. If we were going to see a market decline begin, I would not expect it to be this week. The flood of earnings should keep investors interested.

However, the following week could be trouble. By Friday this week the majority of the high profile big cap stocks will have reported. The earnings excitement will begin to fade even though there are more than 1,500 small and midcap stocks left to report. All the attention is captured by the FAANG stocks and the Dow stocks and those will all be behind us. The post earnings depression phase should appear after Apple reports on Tuesday August 1st. If by chance Apple disappoints, it could be the turning point and the trigger for the depression phase to accelerate.

The VIX has closed under 10 for the last 7 days and that is extremely abnormal. We are due for a correction. The S&P is up 10% for the year. We have not had a 5% decline in 12 months and it has been 9 months since a minor 3% decline.

However, the market breadth is very broad. The advance/decline line on the S&P is in rocket mode and the broadest of the major averages, the Russell 3000, is setting new highs. It is hard to be even slightly bearish until those two factors reverse.

Regardless of what happens after the Apple earnings, this week should have a positive bias. Unfortunately, the Asian markets opened down 1% on Sunday evening and the S&P futures dropped -5 points. They have recovered somewhat but there is a lot of darkness before morning.

The S&P lost only 1 point from its record high on Thursday. There is nothing bearish about that. Friday was expiration day and there were $550 billion in S&P options expiring. It could have been a lot more volatile. Support is now 2,450 with 2,500 round number resistance. I would look to enter a short position on the SPY with a touch of 2,495. (249.50)

The Dow remains the weakest index and the oscillators are on the verge of turning negative. The index stopped at resistance and held there for the entire week. We do have a pattern of higher lows and as long as it does not break below 21,465 the trend is still mildly positive. I could not bring myself to say bullish. I view 21,650 as resistance.

The Nasdaq remains the strongest index. The Composite Index was up 10 days in a row through Thursday but could not extend it to 11 with the minor 2-point decline on Friday. The Nasdaq is in need of a rest but with Google, Facebook and Amazon reporting this week and Apple the next Tuesday, the rest may not come until after the Apple report.

Support is 6,365 and resistance 6395-6400. If the earnings played out correctly, there is a chance of seeing 6,500 as a summer peak. I view that chance as possible but slim. I would enter a short play on the QQQ if it did come to pass.

The small cap Russell 2000 closed at a new high on three days last week and set a new intraday high on Friday. The progress from the April lows has been choppy but we have seen improving relative strength over the last six weeks. If the Russell were to continue higher, it could be bullish for market sentiment.

The economic calendar is of course headlined by the Fed decision on Wednesday. No changes are expected, which means there could be a market upset if they did decide to raise rates or end QE purchases. The market can deal with anything as long as they warn it in advance. We have not had any warnings of impending changes at this meeting.

The OPEC production meeting on Monday could end badly and oil prices plunge as a result. That would be market negative but consumer positive.

None of the other reports are going to be market movers unless there is a significant deviation from expectations.

I know I say this often, but I would refrain from being overly long going into August until we see if historical trends are going to return. Late summer rallies do occur but rarely. When they do, they can be strong because everyone was betting on a decline.

The Senate is going to take another run at moving the health care bill forward this week. If they were successful, it would be market positive because that would put us one-step closer to tax reform. If they are unsuccessful and it appears dead once again, the market could see that as a negative event that pushes the chances for tax reform into 2018.

Enter passively, exit aggressively!

Jim Brown

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