The first week of 2018 saw a stellar performance by the big cap indexes. All of the fears about a potential early January bout of profit taking were erased by a 576 point gain by the Dow, 69 points on the S&P and 232 points on the Nasdaq Composite. With the markets listless to down for the prior two weeks and closing at two-week lows the prior Friday, the shorts were loaded and ready for a collapse. The thing that collapsed was not the market but their trading accounts as stocks and indexes soared to new highs.

There was some selling in a few of the recent gainers and two of our positions, HD and MMM, were stopped out on their declines. However, nearly every decliner over the first two days of 2018, rebounded to regain all their losses and surge even higher before the week was over. The shorts were running for the sidelines all the way into Friday's close when the markets saw a last minute bout of panic buying.

With only a week to go before the Q4 earnings begin to flow, there is little risk of a decline this week. The market may not be as euphoric and we could see some profit taking but I doubt it will be material. Personally, I would welcome a couple days of decent selling to deflate some of the option premiums but unfortunately, it would also deflate some of our gains so it would be a mixed blessing.

It is becoming practically impossible to find potential leap positions without sky-high premiums. With the potential for a market decline after the Q4 earnings cycle we do not want to be adding too many of those high premium plays. If we were to get a minor decline that would help in adding additional positions.

The only visible roadblock to further gains would be the potential for a government shutdown over the budget for the rest of FY 2018. Lawmakers have established their positions in the press and they appear determined not to concede an inch in future negotiations. The democrats are demanding a solution for DACA, no funding for a wall, no discussion of entitlement cuts or welfare reform and funding for social programs equal to the funding for the military. Since the military budget was approved for $700 billion in September, there is no way there will be $700 billion for new social programs. The democrat leaders have vowed to shutdown the government to get what they want. Since they always blame the shutdowns on the republicans, it will be interesting to see how this plays out in the 2018 elections.

If by chance, they kick the can farther down the road OR succeed in some sort of compromise, it would provide another boost to the market.

The economic calendar this week is busy but these reports are unlikely to move the market. Investors and traders are going to be too focused on the coming Q4 earnings (+11.4%) and the potential for significant guidance hikes. The economy is on cruise control and these reports should not cause any trouble.

The Q4 earnings cycle kicks off on Friday with JP Morgan, Wells Fargo, Blackrock and PNC Financial. This will set the stage for the rest of the financial sector to follow.

The S&P blew through resistance at 2,695 and surge 69 points to close well over 2,700 and posted four consecutive record highs. There was no sign of selling and the index closed at the high for the day. Support should be back in the 2,700 range.

The Dow surged through prior resistance at 24,850 to gain 576 points for the week and close at almost 25,300. The last three weeks of gains since late November have come in single weeks. Rally sharply for several days then pause for a week or more, and then repeat. That would seem to suggest a coming pause to consolidate and then another surge as earnings begin to appear. The Dow has surged into overbought territory once again and close just above the regression channel dating back to September.

The Nasdaq big cap stocks caught fire and many closed at record highs. The FANG stocks had been waffling back in Aug/Sep and gains were not correlated well. In November the correlation tightened but over the last week it rose to almost 100% correlation and all four stocks closed at new highs. This is what powered the Nasdaq. When all the generals, including the 11 not in the FANG group, all began to surge at the same time, sellers were trampled.

The Nasdaq has had a nice pattern of rally, pause, rally pause for the last five months. If this pattern continues we should look for a triple digit decline over several days as a potential buying opportunity. Support should be back in the 2695-2700 range.

The Russell small caps are the laggards. The index finally moved over resistance at 1,550 but only by a couple points a day. Over the last three days, the index has gained 2, 3 and 4 points respectively while the big cap indexes were surging higher. If the Russell could post a real breakout move next week it could fuel further big cap gains.

I am bullish on the market over the next four weeks. I believe investors will remain fully invested until the majority of the revised guidance has been given for 2018 as companies report their Q4 earnings. They will decide what the impact of the tax cuts will be and announce their increased earnings guidance and plans for dividends and buybacks. This should keep everyone involved in the market until mid February. Once the earnings begin to fade, we could see some profit taking.

Enter passively, exit aggressively!

Jim Brown

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