S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of October 24, 2016

U.S. equity markets continued to tread water last week as investors spent the week digesting information from seemingly all areas of the universe. The week started with investors trying to figure out the direction of Fed policy after Fed Chair Janet Yellen said on October 14 that she would consider letting the economy run hot before the central bank raises interest rates. This would mean allowing the inflation rate to exceed the 2.0% mandate and the unemployment rate to trickle higher than 5.0%.

Yellen’s statement essentially revealed that she is still dovish about raising rates. Her cautious approach to raising rates may actually underpin the stock market because it would mean rates would remain at or near historically low levels longer than previously thought.

Last week, investors had to deal with the last presidential debate. Although Democratic candidate Clinton is leading in the polls, the price action suggests that investors are still waiting for the actual election results before committing aggressively to the long side. They may be willing to buy the breaks in order to preserve the long-term uptrend, but there is still no evidence that they are committing heavily to the long side because of their refusal to buy strength.

Earnings were also watched closely by investors last week. According to data compiled by The Earnings Scout, 80 percent of the 116 S&P components that had reported as of Friday morning had beaten Wall Street’s earnings estimates, while 65 percent had beaten revenue estimates. These two numbers may have been enough stop the price slide, but once again, they were not strong enough to trigger a breakout to the upside.

Finally, last week’s steep sell-off in the crude oil market was enough to spook investors out of their long positions on Thursday. This raises concerns about the leadership in the market at this time.

Forecast

I expect the benchmark S&P 500 Index to continue to post a sideways, rangebound trade this week as investors prepare for the November election.

Furthermore, the big report of the week comes in on Friday with the release of the U.S. Advance GDP report. It is expected to show the economy grew 2.5% versus 1.4% the previous quarter. Because of the importance of this report and its potential impact on the Fed’s decision to raise rates, I expect investors to hold keep prices in a tight range, not too hot or not too cold. There are just too many uncertainties for investors to deal with at this time and most would rather keep their commitments at a minimum.

Don’t forget the strengthening U.S. Dollar. This may start to cause problems for stock prices because of its potential impact on exports.