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Storm concerns not phasing stock market

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Stocks were flat yesterday as the battle between investors looking forward to a possible tax reform bill and the short-term issues of the hurricanes bearing down on the east coast - not to mention what North Korea's next move is. The Dow ended the day down 23-points with flat to mixed action in the other large indices. Small caps lagged while the I-fund led after the ECB (European Central Bank) reaffirmed a slowdown in stimulus which caused the dollar to head even lower.

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The financials were hit again with yields falling and the Russell 2000 actually has a lot of small bank stocks in it and that could be why it underperformed yesterday.

In Washington there was talk of eliminating the debt ceiling, which seems absurd to me, but I guess it has just been a meaningless moving targets for years now, so I guess what's the difference? Ugh!

Anyway, the market seems to be hanging on and getting past this debt ceiling is what it wants so that they can finally get to tax reform, but we know there will likely be obstruction at every turn so we'll see if that's possible or not.

It's been 10 months since we've seen a 3% correction which, if you've been involved with the stock market for any longer than a year, you'd know how unusual that is. Is it time, being the historically worst month of the year, or will the tax reform talk keep the dip buyers close at hand?
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The SPY (S&P 500 / C-fund) was flat as the momentum from Tuesday's positive reversal may have run out of steam, but that was a decent move. But what now? As we've talked about, in the coming days it may be a battle of the news coming out of Washington vs. Mother Nature. So far 248 has been a double top on this chart but the pullback we've had down to 245 may be enough to reconcile that. The flat action shows that there's not much conviction out there, and that sounds about right at this time, although the fact that stocks are not falling in front of this monster storm may be telling us something.

The DWCPF (small caps / S-fund) pulled back yesterday but again found support at the 50-day EMA. The 50-day EMA can be a very good friend to the bulls, but if it breaks the damage can come quickly. Here we are again testing the key level. The technicians are also concerned about the possible lower high being formed, but that won't be official until a lower low is made.

The Financial stocks have been getting hit as the dollar and yields continue to drop. Despite this terrible development in the financials, the stock market has held up fairly well, so I'm not sure what to make of this yet. As I mentioned above, it could be why the small caps lagged since there are many small banks in the Russell 2000 Index and Dow Completion Index (S-fund).

The EFA (EAFE Index / I-fund) broke to the upside of the bear flag we've been watching. That's an unusual move but it was triggered by the ECB's tapering statement yesterday. Now it may have to deal with a double top and an open gap below, so this may not be a done deal for the upside from here.

The Nasdaq 100 actually closed at its 3rd highest level ever yesterday but it is struggling to stay above the old high from July.

The safety trade appears to be on despite the fact that stocks are not falling. Gold is making a new high almost everyday since it broke out in August ...

And of course bonds continue to move higher while yields go lower and lower. This is strange action with a stock market near its highs, but it could be just a play on the dollar being beaten daily and down to a 2.5 year low.

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Thanks for reading. Have a great weekend, and for those of you on the East Coast, stay safe!

Tom Crowley

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S&P 500 (C Fund)
DWCPF (S Fund)
Dow Jones U.S. Completion Total Stock Market Index (^DWCPF)
EFA (I Fund)
iShares MSCI EAFE Index (EFA)
AGG (F Fund)
iShares Lehman Aggregate Bond (AGG)