Last Tuesday it was a Korean missile over Japan. This Tuesday will be a Korean nuclear test depressing the market.

Unless you live in a cave you probably already know that North Korea tested a new thermonuclear bomb capable of being placed on one of their ICBMs and hitting the USA. Granted, they have not proven this capability but they did post pictures of the bomb, or a mockup, being placed in the nose cone of a missile.

The missile launch over Japan last week was important. Demonstrating the capability to attach a hydrogen bomb to a missile then a day later actually testing that bomb, is an entirely new level of stress. Eventually, they are going to do something that will cause a military response and it will be a major problem for millions of South Koreans.

Today, the S&P futures are only down about 10 points compared to almost 20 points from the prior missile launch. Whether that is because most traders are on vacation OR everyone realizes there are no real options, is unknown. North Korea holds all the cards with 21,000 artillery pieces pointed at Seoul South Korea and nearly 20 million people in range. If he is attacked and the attack fails to eliminate him in the first blast, there will be a counter attack on Seoul.

Since saner minds on this side of the ocean are probably not going to use the military option, Kim Jung-Un can continue playing his game until he finally does something that triggers a response.

The market realizes this and even though the events of the last couple days are bad, there is no real threat to the USA.

Depending on the response headlines over the next 48 hours, the market is likely to open down on Tuesday but just as likely to rebound as it did last Tuesday. The headlines will determine if that rebound will occur.

The S&P rebounded over the last four days back to critical resistance at 2,480. This is the prior high and it should be strong. This is especially true since we are likely to begin with a decline on Tuesday. If the S&P can overcome this level and break out, the next, even stronger level, will be 2,500. This is a massive psychological level with the vast majority of analysts predicting a 2017 year end back at the 2400-2450 level. We are only four months from year-end but the best six months of the year begin on November 1st. Anything is possible but initially that 2,500 level could be a challenge.

The Dow did not return to its highs but it did return to strong resistance at 22,000. That resistance held. The Dow has been the weakest index during the rebound with only minimal gains over the last three days. The breadth on the 30 stocks has been good with only a few decliners but the rest were only posting small gains. The 22,000 level is going to be the area to watch along with the 2,480 level on the S&P.

The Nasdaq was the strongest index with a 207 point, 3.3%, rebound from Tuesday's opening low. Current resistance is the intraday high at 6,460 from July 27th. The index did close at a record high on Friday. The big cap techs were strong midweek but faded on Friday with only 1 of the 11 stocks posting a decent gain. Seven of them were negative. That may have just been some light profit taking ahead of weekend event risk.

The Russell 2000 posted gains for 7 consecutive days and punched through two levels of resistance at 1,388 and 1,400. The index is still a long way from new high resistance at 1,452.

The Q2 earnings are over with the last 2 S&P-500 companies reporting this week. Portfolio managers typically use the September period after earnings to restructure their portfolios for the best six-month period starting November 1st. Second half lows are normally in Sept/Oct and that provides them a buying opportunity.

The economic calendar is busy but weak. The Fed Beige book and the ISM Nonmanufacturing Index are the two biggest reports on Wednesday. There is nothing on the calendar that should be market moving.

It will be interesting to see how the market reacts to the second Korean event in two weeks. The more we have the easier it will be to ignore them until Kim steps over some red line. The normal urge would be to buy an opening dip on Tuesday but we still have 48 hours for the events to play out on the world stage. Anything is possible.

I am encouraged by the rally last week in a typically bad period for the markets. It suggests investors are not as concerned about a government shutdown and there are expectations the budget, debt ceiling and hurricane relief will be packaged in the same bill and passed on a bipartisan vote. I hope we are not under the influence of some magical euphoria drug that only lets us see the world through rose colored glasses. There is still risk and we will see that risk evolve on a daily basis starting next week.

Enter passively, exit aggressively!

Jim Brown

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