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The Standard and Poors 500 Index (SPX) gave back most of last week’s gains this week. SPX closed Friday at 2977, down 19 points on the day, and down 1.4% for the week. The support level to watch is from the early May high around 2950. A secondary support level would be the 50-day moving average (dma) at 2900.

Trading volume in the S&P 500 companies hit a low after the July fourth holiday and has steadily risen for the past two weeks, but remains below the 50 dma. This reinforces the lack of conviction among the bulls. They may not be selling off strongly, but they certainly aren’t buying aggressively either. The Fed meeting next week will eliminate some of the uncertainty holding this market in check. As long as the uncertainty of the China trade negotiations remains, the bulls will remain largely on the sidelines.

VIX spiked up to 14% on Wednesday after opening at 12.6% that morning. Friday afternoon’s sell-off spiked VIX up to 14.5%. I regard volatility levels below 15% to be relatively benign, but this increased level of VIX confirms a moderate level of concern on the part of traders.

Small to mid-capitalization stocks, as represented in the Russell 2000 Index (RUT), may be regarded as the proverbial canary in the coal mine. These are high beta stocks, meaning they will rise faster than the S&P 500 in a bull market and lose value faster in a bear market. Russell stocks are the classic “risk on” and “risk off” stocks, leading bull markets higher and bear markets lower. Russell closed the week at 1548 after opening the week at 1571, down 1.5%, a touch more than SPX’s decline for the week. RUT has been in a steady decline since the beginning of July. SPX and NASDAQ eclipsed their May highs during July, but RUT has yet to recover even its February highs.

After breaking its May highs last week, the NASDAQ Composite index broke that support level on Friday, closing down 61 points to 8147. The pattern in trading volume is similar to the S&P 500, running steadily below the 50 dma since the July fourth holiday. NASDAQ was down 1.4% for the week.

The broad market indices were being cautiously held up by the prospects of a rate cut coming out of next week’s FOMC meeting. The FOMC discussions documented in the last meeting’s minutes were released this week, and it appears that the committee sees the economy as moderately strong, so a rate cut is unlikely. Basic economic data would have to cause the Fed some concern, and the data are pretty solid.

I see three evidences of a nervous market:


•    Consistently below average trading volumes


•    Modestly higher volatility


•    Sideways to lower trending 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. More conservative traders would be well advised to wait until after the Fed announcement on Wednesday before moving additional capital into the market.