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The Standard and Poors 500 Index (SPX) traded steadily higher this week, closing Friday at 3014, up 1.1% for the week. Friday’s trading seemed a little subdued in the morning, but rallied late in the day to push to a new all-time high at 3014. But new all-time highs must be tempered by the weak trading volume. Trading volume in the S&P 500 companies started July almost precisely at the fifty-day moving average (dma) of 2 billion shares. But that was the high for the month thus far. The low trading volume after the holiday last week was to be expected, but trading volume has continued to meander along at low levels this week. This isn’t the sign of a confident bull market.

VIX hit an intraday high on Tuesday at 14.7%, but steadily declined the balance of the week, closing the week at 12.3%. VIX is often called the fear indicator and the market is not panicked by any measure, but it isn’t perfectly calm either. This is a bullish, but nervous, market.

Market analysts watch the small cap stocks carefully as a measure of the market’s comfort with taking on more risk. The Russell 2000 Index (RUT) is composed of small to mid-capitalization domestic companies. Russell closed the week essentially unchanged at 1570 after opening the week at 1574. In fact, without Friday’s strong intraday move of eleven points, RUT would have posted a very negative week. This stands in contrast to the steady gains of the S&P 500 stocks. Russell’s price chart is another indicator of a nervous market.

The NASDAQ Composite index paralleled trading in the S&P 500 this week, setting a new all-time high on Friday at 8244. The pattern in trading volume was also similar to SPX, coming in below the 50 dma since the first of July, and even declining the last three days of this week. NASDAQ set a new all-time high, but without much conviction.

The broad market indices are being cautiously held up by reasonably positive reports concerning the trade negotiations with China, but that could change at any moment with the next news story or rumors from either side of the table.

The prospects of a decrease in the federal discount rate at the upcoming FOMC meeting on July 30-31 is encouraging a bullish mood for the markets, but I think that prospect is unlikely. Interest rates are historically low, and lowering rates is one of the most powerful tools available to the Fed. Basic economic data would have to send up some alarms before the Fed pulls that lever. And economic data is positive on virtually all fronts.

That leaves the China trade negotiations as our principal concern. Given the fact that it could rain on that parade at any moment, the nervousness of this market is not surprising. We see the signs in three principal areas:


•    Consistently low trading volumes
•    Modestly higher volatility
•    Sideways trading in the small caps, as represented by the Russell 2000

Therefore, my outlook remains unchanged. Trade with expectations of a sideways to slightly bullish market, but be prepared to hit the stops earlier rather than later.