S&P 500; US Indexes Fundamental Forecast – September 21, 2016

U.S. stocks closed mixed on Tuesday, pressured slightly by disappointing housing data, but mostly weighed down by concerns over the latest monetary policy decisions from the Bank of Japan and the U.S. Federal Reserve.

The benchmark December E-mini S&P 500 Index futures contract closed at 2131.00, down 2.00 or -0.09%. The technology-based December E-mini NASDAQ-100 Index finished at 4798.50, up 4.25 or +0.09% and the Blue-Chip December E-mini Dow Jones Industrial Average futures contract closed at 18047, down 5 points or -0.03%.

For a second day, the S&P 500 cash market rose about 0.1 percent before briefly turning negative. The Dow Jones Industrial Average cash market rose more than 100 points shortly after the opening before settling about 10 points higher. Finally, the NASDAQ Composite advanced 0.1 percent, led by a strong performance by the iShares Nasdaq Biotechnology ETF (IBB). It rose 1.43 percent.

In economic news, U.S. housing starts came in at an annualized rate of 1.14 million in August, well below the expected 1.19 million. Construction permits fell 0.4 percent to a 1.14 million-unit rate last month.

FORECAST

 

Traders will be watching the Bank of Japan early in the session because no one is sure what it has planned. Any decision is likely to bring about volatility because whatever it does will likely cause a violent reaction by the Japanese Yen.

If the BOJ comes out too strong with a further cut in negative rates and additional stimulus, the Yen could tank. If the Yen drops sharply, stocks could rally because it is a funding currency. Lower rates will only mean that aggressive stock traders can borrow more money at cheaper rates to buy more stock. Additionally, more stimulus means more money to invest in stocks. However, gains could be capped if the market feels the central bank has gone too far and may run out of assets.

If the BOJ is too soft then the Yen will rally. This will make it more expensive to borrow, sending stocks lower.

The market is already prepared for the Fed to pass on a rate hike in September. With only a 12 percent chance of a rate hike at this meeting, investors are still taking a cautious approach because they know that a strongly worded or hawkish Fed statement could mean a December rate hike is coming.

Investors received a little taste of what could happen if there is a surprise rate hike in September when it fell sharply September 8 to September 12. Volatility soared to levels not seen in months. We could see a bearish reaction if the Fed is hawkish, however, there is still the possibility of a “blow-off” rally between now and December.

Look for stocks to rally if the Fed is dovish and the BOJ lowers rates. Stocks are likely to break if the Fed comes out hawkish for a future rate hike and the BOJ decision fails to have a significant impact on the value of the Japanese Yen.

Remember back in April when the BOJ held off on expanding monetary stimulus. At that time, the benchmark Topix stock index fell 3.2 percent and the banking sub-index slumped further, by 6.3 percent, following the lack of any move to help banks with negative rates. This type of reaction could occur again if the BOJ follows a similar path.