The senate convened on Sunday afternoon but no deal was reached to halt the shutdown. Both sides appear to be fortifying their bunkers to withstand the onslaught of negative press when government offices and services do not open for business on Monday. Senator McConnell said he would attempt to call a vote again at 11:AM on Monday but the democrats have blocked the last three efforts saying no votes until the DACA situation is resolved. President Trump and the republican leaders are united behind the "no DACA negotiations" until the government is open again. Trump said the nation of 330 million people will not be held hostage by the democrats over 850,000 illegal immigrants. Obviously, somebody will eventually blink and at this point I am betting the republicans offer some DACA agreement to be presented in future legislation in order to get the democrats to allow a funding vote.

The S&P futures opened down about 5 points and then cut that in half as the late evening vote attempts wound their way through the senate. When the vote was blocked the futures did not decline further and are holding at -3 as I type this.

We do not know where the market will go on Monday. There may be some further selling but I seriously doubt the market will crash. Past shutdowns saw minor declines and strong rebounds when they were over. With the current bullishness underlying the market, I doubt there will be a material decline. If we did see a decent dip it would be a buying opportunity.

The economic calendar is busy but there are no market moving events. This is just business as usual and the economy continues to expand.

The earnings calendar will have the most market impact with eight Dow components reporting earnings. Thursday has the best chance for Dow volatility with CAT and MMM reporting before the open. Netflix will lead off the tech sector on Monday after the bell. This could lift tech stocks to an even higher high. The majority of the big cap techs report the following week meaning the first full week of February could see some post earnings depression weakness in techs.

The S&P surged 12 points on Friday to close well over 2,800 and only 45 points from the median year-end forecast by the major analysts at 2,855. The index is now 225 points or 8.7% above its 100-day average and the widest spread on my charts dating back to the 1970s. The index is overbought but favorable 2018 guidance could lift it higher in the short term.

The Dow is looking top heavy again. The taller candles represent higher volatility and investor indecision. There were back to back 300 point reversals last week and the index could see additional volatility this week with eight components reporting. The Dow is 2,522 points or 10.7% above its 100-day average. This is extremely overbought and post earnings declines in CAT, MMM and BA could be painful.

The Nasdaq has now rallied for three weeks and the recent pattern over the last six months has been for a 2-3 week rally and then a pause for profit taking. I expect the index to remain positive until next week when the majority of the big cap tech stocks report earnings. After their reports, I expect post earnings depression the following week.

The Nasdaq is 605 points or 9% above its 100-day average.

The Russell was the star performer on Friday with the biggest percentage gain. The Russell has only had three strong days since mid December and it not overbought like the other indexes. The small cap stocks should be positive because the tax reform should have a big impact. I would love ot see the Russell break through 1,600 and begin a new leg higher but that is not likely to happen until after the shutdown is over.

I would be a buyer of any shutdown dip for a short-term trade of 2-3 weeks. While I cannot guarantee there will be a market pause for profit taking in February, that would seem to be the logical point and there is a lot of accumulated profit. In the current Q4 earnings guidance there has not been a lot of discussion over what companies are going to do with their new found free cash flow. I had written before that I expect them to disclose that in the Q1 earnings cycle. This suggests we could see a February decline then another ramp higher into the March/April earnings/guidance. This is where the dividends and stock buybacks will be announced.

The Q4 earnings cycle is going to be messy. Companies are taking huge non-cash charges and gains because of repatriation taxes and changes to deferred tax accounts. The Q1 cycle will not have those big charges. There will still be some tax noise but the big emphasis will be on the use of free cash flow and therefore positive for investors. After the Q1 earnings, the summer doldrums could be especially rocky because all the good news will have been priced into the market.

It would not hurt to maintain some extra cash in your account just in case of negative headlines on the shutdown. You never know what will come out of Washington to rock the market.

Enter passively, exit aggressively!

Jim Brown

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