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

The major U.S. stock indices took a breather on Friday as investors booked profits after a stellar performance following the Fed’s decision to leave interest rates unchanged at its meeting on September 21. Although the possibility of an interest rate hike in December may have helped put a lid on prices this week, the Fed’s decision to adjust its outlook for the economy lower and its decision to reduce the number of interest rate hikes in the future, may have sent a signal to longer-term investors that rates will remain near historical levels over the long-term.

The price action also suggests that technical factors may have had an influence on investor activity as the December E-mini S&P 500 Index finished short of its recent top on September 8 at 2182.75. The strong rally from its recent bottom at 2100.25 on September 12 also indicates that investors had priced in the Fed decision.

Looking at the cash market performance on Friday, we see that the blue chip Dow Jones Industrial Average closed 130 point lower. The benchmark S&P 500 Index was off by 0.6 percent and the technology-based NASDAQ Composite dropped 0.55 percent.

The reasons for the sell-offs were mixed. Of course the simplest way to explain the selling pressure is to say that profit-takers came in after the major indices reached their highest levels since early September, or that the NASDAQ rally ran out of buyers after reaching a new all-time high. However, the reasons for the weakness ranged from a steep drop in oil prices that drove down the energy-weighted S&P 500 and Dow to a drop in shares of Apple which affected the NASDAQ.

There was no mention from traders of concerns over Fed policy. The only report for the day was the September read on the Markit Manufacturing Flash PMI which came in at 51.4, below the August read of 52. However, this report was hardly noticed by traders.

FORECAST

U.S. stock indices could continue their corrective mode on Monday as investors prepare for a week filled with chatter from several Fed members including Chair Jane Yellen. However, the major focus early in the week will be the first of several presidential debates. Although the debate is scheduled for Monday evening in the U.S., investors may decide to postpone any major buying until after they can assess the results of the debate on Tuesday.

Also on Monday, investors will get the opportunity to react to the latest New Home Sales data from the U.S. The report is expected to show that 598K units were added in August, below the 654K read in July. FOMC Member Daniel Tarullo is expected to speak, however, his topic is expected to be on bank regulation. If he is pressed to answer questions about the timing of the next Fed rate hike, he may say that he will support a rate hike when inflation starts to pick up.

Look for more of a sideways to lower trade on Monday on light volume ahead of the debate on Monday evening.