The seasonal decline is underway and there is more volatility ahead.

The markets have declined for two consecutive weeks and all the positive catalysts are behind us. The Q2 earnings cycle is almost complete with only 26 S&P companies left to report and 17 of them report this week. August option expiration is over. Many traders and investors will be out of the market the next two weeks as they try to cram remaining vacation time in before Labor Day and get the kids back into school. Volume is going to be very light, especially on Monday because of the eclipse.

When everyone comes back to work after Labor Day all eyes will be on Congress. When they return from the August recess they will have only 12 working days to pass a highly combative budget and increase the debt ceiling before the government runs out of money on September 30th.

Goldman Sachs said on Friday there was a 50% chance of a government shutdown. The last time that happened in 2011 the S&P lost 246 points in only 11 days. While I do not expect a repeat, I do expect some additional volatility and market weakness heading into those budget battles.

On September 20th, the Fed is likely to begin tapering QE purchases. The last time they tried this the market reacted badly. The expectation for this tapering has been broadly discussed for the last year and it will not be a surprise to the market but that does not mean there will not be another taper tantrum.

Now add in the potential for additional volatility from presidential actions and the market has a lot of risk ahead over the next six weeks.

Basically, there are multiple potentially negative events and very few potentially positive events to offset those negative catalysts.

The S&P declined to test initial support at 2,420 on Friday but that should only be a pause point on the way to 2400-2410 and lower. The S&P has not had a decent correction since January 2016. We are due for a decent dip of 5% or more. With a calendar of negative catalysts ahead, this would be the perfect opportunity.

The Dow remains the strongest index but it has also begun to fade. Support levels are 21,500, 21,300, 20,900 and 20,400. Recently we have had a continuous stream of Dow components rotating into and out of the leadership position and keeping the index up but that may be coming to a close. The Dow is nearly 450 points down from its high just two weeks ago. If investors see a wave of negative catalysts headed in our direction they may turn into sellers.

The Nasdaq is down -268 points from its high and it seems likely that it will test 6,100 soon. That is a logical buy the dip support level and could halt a decline for some period of time. If we were to blow through that level, 5,800 would be the next target and nearly a 10% decline. The majority of the big cap stocks have negative charts with pending support breaks. If we get just one more day of high negativity, we could see the beginning of a waterfall event when those big stocks break below critical support.

The Russell 2000 remains the weakest index, now -5.4% off its highs and threatening to break support at 1,340 that has held since January. There is a lot of white space on the chart below 1,340 and the next material support at 1,157. Let's hope we do not go there but the chart is ominous.

The earnings calendar is shrinking and, Hewlett Packard and Broadcom are the big reports for the week.

The economic calendar is highlighted by the Janet Yellen speech at the Fed's Jackson Hole conference on Friday. The topic will be "Financial Stability" and she is expected to lay out a case for tapering QE purchases. When Yellen speaks, there is always the potential for a market moving comment.

While nobody can accurately predict the market's future, I think you will agree the surplus of negative catalysts is troublesome. However, it is said the market likes to climb a wall of worry so there will be plenty of that for the bulls to hurdle.

We have been fortunate to not lose a lot of positions over the last couple of weeks because we have some wide stops. That eventually becomes a liability if the market really begins to tank. Just remember, you can exit at any time. It is your money. If we do have another down week, I will tighten the stops and prepare to take us out and we will try to buy the end of September dip.

Enter passively, exit aggressively!

Jim Brown

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