S&P 500; US Indexes Fundamental Forecast – December 2, 2016

U.S. stock indexes are trading lower early Friday in reaction to weakness in the European equity markets. Investors overseas are selling due to the political uncertainty in Italy and France.

The main concern for investors is the referendum in Italy. Worries include the possibility of fresh elections and complications over the recapitalization process of Italian banks. In France, investors are jittery over the announcement that President Francois Hollande will not be seeking a second term in the country’s upcoming presidential election.

The early price action also reflects general nervousness ahead of the release of U.S. Non-Farm Payrolls data for November on Friday. Rising inflation expectations and a tightening labor market are likely to mean the Fed will be less dovish in its next monetary policy statement. This may include forecasts for more frequent rate hikes than previously expected.

The U.S. jobs report is expected to show the economy added 177K jobs in November. I think the actual number will top 200K given the robust jump by private employers as reported earlier in the week by ADP.

Average Hourly Earnings, a Fed favorite, are expected to show an increase of 0.2%, below the previous 0.4% reading. The Unemployment Rate is expected to come in unchanged at 4.9%.

The divergence between the S&P 500 Index and Dow and the NASDAQ has re-emerged after disappearing for nearly two weeks. This suggest that despite reaching new all-time highs recently, the markets may not be that strong. It could also mean that a massive sector rotation is taking place because of president-elect Donald Trump’s proposed economic policies.

I mentioned earlier this week that stocks would be under pressure this week once the major players returned after the Thanksgiving holiday week and I think we are seeing strong evidence of this taking place. Stocks are now in a position to post major reversals to the downside on the weekly charts. This suggests we may see a two to three week correction into the Fed’s interest rate announcement.

Rising Treasury yields may also be behind the selling pressure since stocks compete with Treasurys for investor assets.

The CBOE Volatility Index (VIX) is also indicating that investors are looking for volatility to return. This, combined with the price action, suggests investors should start preparing for a volatile move to the downside.

I believe that over the near-term, investors will get the opportunity to re-enter this market at more favorable prices because we’ll eventually see a retracement of at least 50% of the rally from November 8.

I’ve mentioned several times in recent articles that the major players – banks and institutions – are not interested in buying strength or chasing this market higher at this time. They are waiting for a correction into a value area. It makes sense, given all the uncertainty over taxes, regulations and trade policies, to wait for good entry prices.