S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of December 19, 2016

Early in the week, the way of least resistance was up and the major stock indexes appeased bullish investors by charging to new all-time highs. The upside momentum slowed on December 14, however, when the U.S. Federal Reserve hiked its benchmark interest rate, 25-basis points while issuing a forecast for at least three more rate hikes in 2017. This news came as a surprise since the Fed had previously forecast two more rate hikes back in September.

For the week, the Dow Jones Industrial Average closed at 19843.41, up 0.40% and is now up 13.9 year-to-date. The benchmark S&P 500 Index settled at 2258.07, down 0.1%. It is up 10.5% in 2017. The NASDAQ Composite closed at 5435.99 also down -0.1%. This index is up 8.6% for the year.

Since November 8, stocks have rallied sharply with the Dow about 1 percent away from hitting 20,000 for the first time. The blue chip index has also notched 16 record closes since the election.

Forecast

This week is the week before the Christmas holiday so it is possible that we’ll start to see a general tapering of volume in the stock market. It may even carry over into the week before New Year’s. The direction of the markets will be determined by whether aggressive hedge fund or mutual fund managers want to try to squeeze out as much profit as they can before the end of the year to sweeten their bonus pool, or whether they just want to pack it in early, take profits, square positions and take the next two weeks off.

The indexes retreated late Friday due to geopolitical tension. According to Reuters, a Chinese Navy warship captured a U.S. underwater drone deployed by an American oceanographic vessel in international waters in the South China Sea. Traders will be watching the events over the week-end to see if this escalates into something major. If it does then look for investors to use this as an excuse to book profits. This will likely lead to a sharply lower opening that could set a negative tone for the week.

Additionally, the financial stock sector closed lower for the first time in five weeks, while utility and telecommunication stocks posted a gain. If these events represent a shift in investor sentiment in these sectors then look for lower markets if there are follow-through moves next week.

I wouldn’t be surprised if the markets finish lower this week. However, under thin holiday trading conditions, one has to be leery of potential volatility spikes.

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