Every negative headline is being ignored and even weak earnings are sometimes bought. The bulls are still stampeding with a record $33.2 billion in inflows to equity funds last week. The Fear of Missing Out (FOMO) rally is still in progress and there is an even bigger week of earnings ahead of us. This is the week for tech stocks with Amazon, Alibaba, Microsoft, Google, Facebook, Apple, etc. Any tech investor with a dollar left in his account is going to be laying down bets on one of those tech stocks.

There are 125 S&P companies reporting including ten Dow components. While tech stocks will be the highlight, Conoco, Exxon and Chevron plus about a dozen other energy companies will also report.

The economic calendar is also busy. This is a payroll week, FOMC meeting, ISM Manufacturing and State of the Union speech. There are a lot of reports that will be competing for headlines along with the busy earnings calendar.

The payroll reports will take a back seat to the FOMC announcement on Wednesday. The Fed is not expected to hike rates at this meeting, which will be Janet Yellen's last meeting. Jerome Powell was approved by the Senate last week and will assume the Fed Chair position on Feb 1st.

The way the immigration fight is shaping up in Washington the odds are good we are going to get another government shutdown. Like we saw last week, the negative impact to the market was weak and the post shutdown rebound was strong. I would expect that same cycle if another shutdown appears. That deadline is February 8th.

The State of the Union speech on Tuesday could be a wild card. We never know what will be said and how it will impact the markets. Comments over trade wars, dollar weakness, treasuries, interest rates, tariffs, North Korea, Russian investigation, etc, could cause ripples in the pond.

The rally has gone vertical on the indexes, with the exception of the Russell 2000. The Dow is closing in on 27,000 and the S&P on 2,900. The Nasdaq went from 7,400 to a close over 7,500 in only four days. Euphoria is accelerating. S&P futures are up +3.50 on Sunday night although that could easily change by morning.

The median year-end target for for the S&P from a survey of 18 analysts is 2,855. Goldman Sachs has a target at 2,850. Those were both passed last week. However, nearly every analyst expects a significant decline over the summer months and then a rally back to the highs in Q4. Time will tell if they are tight.

The S&P had two blowout days last week on Monday and Friday to gain 62 points and catapult the index to even higher overbought levels. Support us back at 2,800 followed by 2,750.

The Dow is the most overextended index. The RSI is at a record level of 92.03 and the index is 2,845 points over its 100-day average. The Dow has gained 8,729 points or 48.8% since the election without a material dip. The index has truly gone vertical and looks like a dot.com chart rather than a 2018 chart. Support is now back at 26,000 and the next likely target level is 27,000.

The Nasdaq moved from 7,400 to 7,500 in only four days. The Wednesday intraday decline of -110 points took some of the wind out of its sails but it was a very brief rest. The index gained 95 points on Friday with all 15 big cap tech stocks closing with gains, mostly big gains.

The Nasdaq is now 718 points over its 100-day average. The index is not quite as vertical as the Dow but as you can see in the chart the gains have been aggressive. It has been four weeks without a material bout of profit taking and the index was averaging a retracement every 2-3 weeks for the last six months. I am targeting the first full week of February as a possible retracement.

The Russell 2000 is not nearly as overbought as the big cap indexes. The Russell has been making an orderly progression higher interspersed with declines and days where the index was barely positive. This is what a normal market gain should look like. Support is 1,600 with resistance at 1,610.

In the time it took me to type this commentary the futures have reversed and are now negative. Investor indecision has got to be growing given all the big moves and reversals. The Dow has had three 300-point reversals in the last two weeks. That is very trying on investor confidence.

I am still positive on the market today but I am expecting a potentially rocky February. I am not expecting a correction, just some normal profit taking that lasts more than one day. It is nearly impossible to find a chart to buy because all the good stocks have charts that look like the Dow and very overbought and all the mediocre stocks have charts that are either sideways or down. With more than half of the tradable stocks having earnings over the next two weeks, that also complicates stock recommendations. This impacts not just the readers of this newsletter but the entire market. Everyone else is having the same problem. Multiple analysts have talked about the tens of billions of dollars on the sidelines just waiting for a decent dip to buy. This is why I doubt any market decline will be severe but I could be mistaken.

Enter passively, exit aggressively!

Jim Brown

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