S&P 500; US Indexes Fundamental Forecast – October 26, 2016

U.S. equity markets started out higher on Tuesday, mostly in reaction to Monday’s strong close. However, sellers started to come in early, shortly before the cash market opening. This set a slightly bearish tone early that continued to build into the close.

Volume was high and volatility came to life as investors reacted to a slew of news, including disappointing earnings, a steep sell-off in oil prices and weaker-than-expected U.S. economic news.

In the cash market, the benchmark S&P 500 Index finished at 2143.16, down 8.17 or -0.38%. The Blue Chip Dow Jones Industrial Average closed at 18169.27, down 53.76 or -0.30%. The tech-based NASDAQ Composite closed at 5283.26, down 26.57 or -0.50%. The popular December E-mini S&P 500 Index ended the day at 2138.00, down 6.25 or -0.29%.

The selling started early in the session after Caterpillar and 3M posted mixed results. Both beat the estimates on the bottom line, while missing on the top line. Caterpillar also lowered its 2016 earnings per share guidance. This news set a bearish tone before the futures market open.

Traders were also reacting to another surge by the U.S. Dollar. This raised concerns that the stronger Greenback could cause a drop in exports, potentially hurting the bottom line of international corporations.

The final blow was delivered by a sharp sell-off in oil prices which dragged down the energy sector that is a major component of the S&P 500 Index and the Dow Jones Industrial Average.

Investors also reacted negatively to a bigger-than-expected drop in U.S. consumer confidence. It came in at 98.6, well off the 101.5 estimate.

Forecast

Traders should use Tuesday’s market as a blueprint for today’s price action. Look for support to continue to erode if oil prices continue to retreat. There is not much to say about the Fed at this time since most investors expect the central bank to raise rates in December.

The polls say that the election should not be a factor, but I suspect investors are standing on the sidelines until at least after November 8. Additionally, investors are fully aware of what the polls indicated shortly before the surprise Brexit vote.

I’m looking for further downside action today with the best target for the December E-mini S&P 500 coming in at 2128.75 to 2123.75. We could see a technical bounce on the first test of this zone.

After this break, the stock indices may go into a sideways trade as investors await the results of Thursday’s U.S. Durable Goods report and Friday’s Advance GDP.

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