S&P 500; U.S. Indexes Fundamental Analysis – Forecast for December 2016

U.S. stocks rose sharply in November as Wall Street celebrated the upset presidential election victory of Republican Donald Trump. After analysts and pundits warned for months that a Trump win would create uncertainty and damage sentiment, investors poured money into sectors they believed would benefit from Trump’s economic policies.

Initially, the markets sold off sharply as investors reacted violently as they watched Democratic candidate Hillary Clinton’s apparent victory fall apart right before their eyes. At one point, the December E-mini S&P 500 Index futures market dropped limit down, or 5 percent at the Chicago Mercantile Exchange.

Healthcare and financial stocks posted the best gains. Trump had said that he would likely repel Obamacare and loosen some of the banking regulations. Real estate and utilities fell the most because of the threat of rising Treasury yields.

Money left the fixed income markets and moved into the stock market. Traders sold the two funding currencies – Euro and Japanese Yen – as investors took out cheap loans in the Euro Zone and Japan to buy stocks.

Towards the end of the month, the rally began to taper off with the NASDAQ Composite losing the most ground as investors dumped the FANGs – Facebook, Amazon, Netflix and Google – in a reallocation play designed to take advantage of Trump’s new economy.

On the last day of the month, the Dow Jones Industrial Average and the S&P 500 Index soared to new all-time highs after OPEC agreed to make production cuts. This helped boost the energy sector.

Forecast

Stocks are expected to continue to remain firm in December, however, we could see a short-term break early in the month due to overbought trading conditions. Sellers could also react to the Fed’s rate hike decision on December 14 although investors feel this decision is already built into the market.

I’d like to see a correction into a value zone then a “Santa Claus” rally into the end of the year. However, the divergences between the Dow, S&P and NASDAQ suggests that investors may not all be on the same page.

At the end of November, the Dow was the strongest market and the NASDAQ Composite, the weakness. In order to have a bona fide year-end breakout to the upside, I’d like to see both indexes moving in the same direction.