Investors are showing no signs of turning bearish with a monster rally in progress. The first nine days of 2018 are in the books and I am sure we would all like to see nine more days just like the first set. The market is off to the best start since 2003 with the Dow up 1,083 points to start the year. This has turned into a fear of missing out (FOMO) market with all investors hoping for big gains from the tax cuts and rising earnings.

S&P estimates are over 12% earnings growth for Q4 and 7% revenue growth and that does not count any of the benefits of the tax reform. Estimates for 2018 tax related earnings growth could rise from 7% to 15% depending on the sector, in addition to regular earnings growth. This could be a once in a generation year for earnings growth.

With the Q4 earnings picking up speed next week, we could begin to see some announcements and guidance that includes the tax benefits. So far, companies have been tight lipped because they are still trying to wade through the 500 pages of details. As Q4 earnings are reported over the next four weeks we should get a good idea of the benefits. Many companies will wait until the Q1 earnings to reveal their plans for the extra cash and that is actually good for us. That bit of catnip out in the future could keep the markets from collapsing in mid February as Q4 earnings begin to fade. I am sure there will be some weakness from those who believe all the good news is priced in but there should be a group of investors holding out for the dividend hikes and buyback announcements.

I was worried that the overblown rally from the first two weeks could cause some selling next week but the S&P futures were up +7 late Sunday evening. There is a lot of time before the open on Tuesday but the positive futures are a good sign. It also means there may be no market fall out from the Hawaii false alarm.

The remaining challenge for the market is the government funding deadline on Friday at midnight. The two sides seem to be moving farther away from each other than closer to a compromise. If we do get a shutdown that tanks the market, I believe it would be a buying opportunity.

The Fed Beige Book and the Philly Fed Survey are the two important reports for the week but neither are expected to move the market. New residential construction will also generate some headlines but we all know the housing market is doing well.

There are 27 S&P companies reporting earnings this week and that includes four Dow components. Goldman Sachs and United Health are the two Dow stocks with the best chance of creating some volatility in the Dow. IBM is the sleeper company and could easily surprise in either direction.

The S&P has gained 113 points in 2018 and is way outside the prior trend channel. In theory, the uptrend resistance should now be support and that is in the 2,750 range for next week. The S&P is more than likely going to hit 2,800 and Goldman's target for 2018 is 2,850. The index is definitely overbought and due for a rest.

The Dow used the prior uptrend resistance as support early in the week before blasting off to 25,800 with back to back 200 point days. If the Dow hits 26,000 this week it will be the fastest 1,000 point interval move in history. The index has gained 1,083 points already this year but has only crossed one 1,000 point interval at 25,000.

The Dow is definitely overbought and Boeing has supplied 265 of the Dow points in 2018. When Boeing eventually decides to correct it is going to be painful.

The Nasdaq is definitely out of character with the 357 points or 5.2% gained in 2018. The index had been making regular pit stops for profit taking every 2-3 weeks for the last six months. The current rally is two weeks old so we should be due for some weakness soon. However, I would not expect anything serious until after the big cap techs report. We may see some short term weakness but not any material selling until mid February.

The Russell 2000 exploded higher on Thursday for a 1.73% gain. There was no explanation but there was some serious short covering. After several weeks of lackluster single digit moves, it finally reached the point there shorts capitulated. I seriously doubt the index is going to power over 1,600 without some backing and filling first.

We have a strong market with a lot of potential catalysts in our immediate future. There is no reason for the market to suddenly roll over BUT the market does not need a reason. Sometimes it just happens when several big funds decide to take profits at the same time.

Beware the government funding deadline. If we get through Wednesday without some signs of compromise, then Thursday and Friday could begin to be volatile.

I left the stop losses wide on most of the positions because I do not want to be shaken out of them like we saw with several stocks the prior week. That means we will give back more of our gains if a real decline appears but there is no easy button on applying stop losses. Readers are encouraged to set your own stops as tight as you want. If you are stopped out and the market rebounds, just jump back into that same position. Because the newsletter is weekly, I cannot do that. I have to live with a weekly stop and therefore I am leaving them wide.

We have had a very good run recently and I expect it to continue. We closed out about $10,000 of gains the prior week but I expect the next several months to build up an even larger total.

Enter passively, exit aggressively!

Jim Brown

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