S&P 500; US Indexes Fundamental Forecast – October 5, 2016

The major U.S. equity market finished lower on Tuesday, but remained inside their one-week range. Despite the sideways price action, the bias was, for the most part, to the downside. The catalysts behind the weakness were the stronger dollar, bearish remarks from the International Monetary Fund and hawkish comments from a Fed official.

As far as the cash market was concerned, the Dow Jones Industrial Average close about 85 points lower. The benchmark S&P 500 Index fell 0.64 percent and the NASDAQ Composite ended the session down 0.2 percent. The popular December E-mini S&P 500 Index closed at 2144.75, down 8.50 or -0.39%.

Stocks spent most of the session gyrating between positive and negative before sellers took over late in the session. A clash between different strategies may have led to the choppy, two-sided trade. One school of thought had investors selling because of the strong dollar, while technical momentum investors were buying the dips.

Sometimes it looked as if investors were just making a market and biding their time ahead of Friday’s U.S. Non-Farm Payrolls report.

In the news, the IMF put some pressure on the markets after releasing its “World Economic Outlook” on Tuesday. In the report, it said that overall global growth is expected to expand at 3.1 percent in 2016. However, it lowered the forecast for advanced economies, including the United States, when it said growth will slow to 1.6 percent. It came in at 2.1 percent last year, however, it remained unchanged from the July forecast.

Stocks were also pressured after Richmond Federal Reserve President Jeffrey Lacker said he would have voted in favor of an interest rate hike at the September policy meeting had he been able to vote. His comments reflect the growing pressure on Fed Chair Janet Yellen to raise rates.

Investors also sold after a report of a possible tapering of bond purchases sooner than expected by the European Central Bank.

FORECAST 

Barring any negative news regarding Deutsche Bank, we’re looking for more of the same type of trading we saw on Tuesday. If there is going to be a reaction in the markets, it is going to be in response to today’s ADP Non-Farm Employment Change and ISM Non-Manufacturing reports.

The ADP report is expected to show the economy added 166K jobs in September. A higher number could pressure stocks further because it will mean the labor market is strengthening, increasing the chances of a Fed rate hike. A lower number could trigger a short-covering rally.

The ISM Services report is expected to show an increase from 51.4 to 53.1. This will also be supportive for a rate hike.