S&P 500; US Indexes Fundamental Analysis – Forecast for the Week of December 5, 2016

U.S. equity indices closed mixed last week with the Dow Jones Industrial Average finishing the week slightly better while the S&P 500 Index and NASDAQ Composite closed lower. The Dow traded mostly steady to better. The S&P showed some strength at times, but the rally failed to attract enough buyers to continue the move. The NASDAQ Composite broke sharply lower throughout the week.

Both the S&P 500 Index and the NASDAQ Composite Index ended their 3-week winning streaks.

The volume was relatively light ahead of Friday’s U.S. Non-Farm Payrolls report. Early in the week, the economy received a boost from better-than-expected U.S. GDP and ISM Manufacturing PMI reports.

The Dow and S&P 500 surged mid-week after a decision by OPEC to cut production drove up the oil sector. Unfortunately, it also raised concerns over inflation which drove up U.S. Treasury yields.

Friday’s U.S. jobs report was mixed. The headline number came in as expected. The unemployment rate fell to 4.6%, but average hourly earnings came in weaker than expected.

The surge in oil prices due to the OPEC deal may have been the key headline this week, but one thing that needs to be mentioned is the massive roll out of technology stocks. Once again, sellers hit the so-called “FANGS”, Facebook, Amazon, Netflix and Google. If this starts a downtrend in the NASDAQ then the upside in the Dow and S&P 500 is likely to be limited.

Forecast

With the U.S. Non-Farm Payrolls report out of the way and the market putting a 93% chance on a Fed rate hike later this month, the focus will shift this week to the key constitutional referendum in Italy.

The outcome of Sunday’s referendum in Italy will likely set the early tone in the markets this week. Italian Prime Minister Matteo Renzi wants to change the constitution so that the executive branch needs approval only from parliament’s lower house in order to pass laws. Renzi thinks this change is so important to turn around Italy’s lackluster economy that he has vowed to resign if the referendum is defeated.

Stock investors are taking a cautious approach to the Italian referendum because of Renzi resigns, we could see political uncertainty that could drive the Euro lower. Basically, any kind of uncertainty at this time is likely to trigger a knee-jerk reaction in the global equity markets, similar to the response but not the magnitude of Brexit and Trump’s surprise election.

If there is uncertainty then investors will sell equities while they sort out the details of the event.

After the initial reaction to the Italian Referendum, the major indices are likely to settle into a range ahead of next week’s U.S. Federal Reserve interest rate decision.