S&P 500; US Indexes Fundamental Forecast – December 19, 2016

The major stock index futures closed lower on Friday, driven lower by financial stocks and geopolitical tension. Financial stocks surprisingly retreated after a five-week rally. They had been supported since Trump won the election in November because he supports the relaxing of some banking regulations and by rising interest rates. Banks make more money when rates rise.

The markets may have simply retreated due to profit-taking and position-squaring ahead of the Christmas and New Year holidays. Some traders say that the major institutions, banks and mutual funds may take the next two weeks off. This could limit the upside potential of the indexes. However, if volume drops below average, it will open up the possibility of volatility spikes.

In the cash markets, the benchmark S&P 500 closed at 2258.07, down 3.96 or -0.18%. The blue chip Dow Jones Industrial Average finished at 19843.41, down 8.83% or -0.04% and the NASDAQ Composite ended the week at 5435.99, down 20.86 or -0.38%.

Investors also reacted to the news that China seized a U.S. underwater drone. As of Saturday, China said it is returning the drone.

Forecast

According to early reports, Asian markets are expected to open mixed on Monday. Japan’s trader data was supportive, but there are some lingering concerns over the drone incident with China. Australian markets were also called steady ahead of the national budget announcement. This report is important because it could lead to a ratings downgrade for the country.

We’ll be watching the U.S. markets closely to see if there is some overhang from the drone event. We’ll also be watching the volume because of the possibility of an early holiday vacation from the major players.

In the U.S. on Monday, investors will get the opportunity to react to the latest Flash Services PMI. It is expected to come in at 55.2, up from the previous 54.6.

Early Tuesday, the BOJ will issue its monetary policy statement. It is expected to upgrade its outlook for the economy in reaction to the sharp drop in the Japanese Yen.

This is always a difficult week to forecast because volume is historically very low. Stocks could rally to new all-time highs on low volume. The Dow could also reach 20,000, but it won’t mean much if the volume is light.

I guess the best thing to do this week is to continue to focus on the trend. Counter-trend moves could prove to be difficult to trade because most will be fueled by profit-taking selling rather than new shorting. Furthermore, the light volume opens up the possibility of volatility spikes.

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