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The leaders lead, the large caps stall

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Stocks were flat to modestly higher yesterday, depending on the index. The Nasdaq and small caps continue to lead on the upside and both made new highs yesterday. The Dow (down 14-points) and the S&P 500 (up 2) were basically flat on the day and the charts that we've been posting kind of told us why that might be the case (open gap filled, etc.) The Transports were down, as were the financials, while oil was up slightly.

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The market, at least pockets of it, and the economy seem to be running on all cylinders. Unemployment is at a multi decade low, GDP is up, inflation is under control, interest rates are still low despite being raised. So is this the perfect storm (in a good way) for stocks?

That's what you'd think if you're watching TV and listening to the pundits, but let me ask you this... What do you think these same conditions were like when the bear market ended and the market bottomed in early 2009? They were awful. Now guess when the last time we saw the unemployment rate under 4%? That would be the year 2000, just before the dot com bubble burst.

Bull markets don't start when the data is perfect. It means we're closer to perfection, which means prices are more likely to be close to a peak than being good buying opportunities. I hope that makes sense.

I'm not calling for a market top, but let's say after a 9 year bull market with perfect economic data, it may be better to be careful than complacent. Of course momentum can last much longer than seems reasonable, but high prices make good selling opportunities, not good buying opportunities.

The one caveat is President Trump who, love him or hate him, is making changes to taxes and regulations like few before him, which is emboldening businesses, and while it is rarely "different this time", perhaps this time it is? I don't know.

We're a week away from the next probable rate hike from the Fed after next Wednesday's FOMC meeting.

The S&P 500 / C-fund inched higher yesterday but the momentum subsided a bit as the resistance builds. As we've talked about, the open gap from March was filled this week and now the rally could struggle from here, but if it can move above it, it could be a strong rally. This is an interesting pivot point for the S&P.

The S-fund broke above a bearish rising wedge formation yesterday, and with some authority. I'm not sure what stops it here since resistance is now in its rearview mirror, but as we talked about above, is this acting too well, or can it continue higher without a pullback after this recent one month 7.5% rally?

The Dow Transportation Index bucked the trend of the general market again and also broke below that "F" flag that we've been monitoring. It was a sharp decline as we would expect out of an F flag, but instead of a breakdown, it made its way back toward the flag by the close, clinging just below it. Today will be interesting to see if it can get back into the flag, or if the late bounce on Tuesday runs out of steam today.

Keeping an eye on the price of oil shows it moved slightly higher on the day, but it had fallen over 12% in the last two weeks so it was probably due for some relief.

The financials were down again so filling that gap and getting back above the 50-day EMA remains a chore for this sector.

The EAFE / I-fund was down on the day as the problems in Europe don't seem to be going away.

The AGG (Bonds / F-fund) was up slightly as the yields dipped back to 2.9%. The open gaps are still on the radar as possible targets but the 50-day EMA seems to be trying to hold in the short-term.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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