S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of September 26, 2016

U.S. equity markets rallied last week, boosted by a less-hawkish U.S. Federal Reserve monetary policy statement. December E-mini S&P 500 Index futures finished the week at 2158.00, up 25.50 or +1.20%. The blue-chip December E-mini Dow Jones Industrial Average futures contract closed the week at 18190, up 137 or +0.76%. The Technology-based December E-mini NASDAQ-100 Index settled at 4856.50, up 42.25 or +0.88%.

The major stock indices were helped last week when the Fed voted to leave interest rates unchanged. Additionally, although the central bank hinted at a December rate hike, traders are indicating that the chances of that taking place are 50/50. Furthermore, the Fed cut its outlook for the economy while reducing the number of potential rate hikes. All of these factors are supportive for stock prices because they mean the Fed could leave rates at historically low levels for a longer period of time than previously expected.

Stock investors like low rates because they send investors into equities in an effort to capture a return on investment and a yield that is paying more than government debt relative to the risk that it carries.

FORECAST

Despite the bullish tone the latter half of the week, the S&P 500 and Dow Jones Industrials weren’t really pulling away from the price range that has held the markets in check since early July. This indicates general uncertainty about the strength and direction of the market.

The price action late last week may be projecting increased demand for higher-risk assets, but there are still some outside factors hindering an all-out breakout to the upside and the start of another bullish leg.

Traders are concerned about the rising Japanese Yen. This is because the Yen is a funding currency and the higher it moves, the more expensive it becomes to borrow in Yen and convert to U.S. Dollars.

Traders are also worried about the direction of crude oil prices. Higher crude prices have been supportive for the indices because they have exposure to the energy sector. However, lower oil prices have been limiting the upside movement in the Dow and S&P 500. Just take a look at the NASDAQ Composite. It faces almost no exposure to oil and it reached a new all-time high last week. So if we are going to get the Dow and S&P 500 at historical levels, we need support from higher oil prices.

This week’s presidential debate should also bring volatility to the markets because of the contrast in views by the candidates. With a little more than a month to go before the November elections, these debates may help undecided investors pick a candidate. The market may sway in both directions depending on the outcome of the debates.

Due to the number of headwinds facing stock investors this week, I’m looking for a sideways to lower trade. I’m also looking for volatility because of the OPEC decision and the debates.