S&P 500; US Indexes Fundamental Forecast – September 29, 2016

After drifting lower most of the session following testimony by Fed Chair Janet Yellen, a so-so U.S. Durable Goods report and nothing worth-noting speeches by several Fed officials, U.S. equity markets surged to the upside into the closer, buoyed by a report that OPEC had reached a deal to cut production.

The news took traders by surprise and buyers took advantage of the thin, afternoon trading conditions to drive the Dow Jones Industrial Average 110 points higher into the close. Needless to say, the rally was fueled by the energy sector, led by ExxonMobil.

Rounding out the rest of the market, the benchmark S&P 500 rose 0.5 percent as its energy sector rose over 4 percent. The tech-heavy NASDAQ Composite that has very little exposure to energy stocks closed about 0.2 higher.

Earlier in the session, traders showed little reaction to the U.S. Durable Goods report that showed Core Durable Goods Orders came in at minus 0.4% in August versus a minus 0.5% estimate. Durable Goods Orders came in flat versus minus 1.0% expectations.

The session was also filled with a number of Fed speakers led by Chair Janet Yellen. In a prepared testimony to the House Financial Services Committee that U.S. banks are well capitalized, but remain challenged by weak interest income. As far as her comments on monetary policy, all she was able to say was the central bank does not have a “fixed timetable” for raising rates. Hardly the information that the bulls or the bears were expecting.

Minneapolis Fed President Neel Kashkari said the Fed can keep interest rates low for longer because even with jobs being created at a “pretty healthy clip” low rates are not creating inflation.

St. Louis Fed President James Bullard also gave a speech but did not comment on Fed policy. Finally, Chicago Fed President Charles Evans said in a speech that raising rates because of financial stability concerns could leave the central bank less able to hit its inflation target.

None of this news mattered at the end of the day because it was trumped by the events coming out of Algiers.

FORECAST

Bullish traders were blessed with another round of good news on Wednesday when OPEC announced “an agreement to make an agreement” to curb oil production. Now that this issue is out of the way, investors can focus on the outcome of the November elections.

Over a week ago, investors received notice that the Fed would pass on a September rate hike, while leaving the possibility of a December rate hike open if the labor market remains strong. Earlier this week, Democratic candidate Clinton outperformed her Republican rival Trump in the first debate. Moving her closer to solidifying the Office of President in November. Based on all of these events, everything seems to be coming up roses for bullish stock players.

With the S&P 500 Index hovering near its all-time highs, the most logical impediment to it taking out these levels is the question of valuation. Taking out the all-time high and sustaining the rally through it will send a signal to traders that it is going to be smooth sailing through the election and quite possibly to the end of November OPEC meeting then finally the Fed’s last interest rate decision of the year in December.

If you believe there aren’t going to be any bumps in the road between now and the end of the year then you have to get long with both hands (a trading expression meaning buy everything you can get your hands on). If you are sure that the market is wrong and that Trump will win, OPEC will break the agreement and the Fed will raise rates in December then your catch phrase should be “Think long, think wrong.”

If you believe there will be bumps in the road especially leading up to the election then you have to play for a rangebound market. This means selling rallies and buying breaks until the market proves you otherwise.

At current price levels and the number of major events coming up, I prefer to climb the wall of worry and am going to place my bets on a sideways market until the end of the year.