S&P 500; US Indexes Fundamental Forecast – December 6, 2016

After approaching the Italian Referendum with caution last week, U.S. stock investors shrugged off the result with enough buying power to produce a new all-time high in the Dow.

U.S. equities closed higher on Monday as investors decided to downplay the key referendum in Italy which led to Prime Minister Matteo Renzi’s resignation. Personally, It don’t think most investors actually knew what a “yes” or “no” vote would mean to the global economy. At times, the markets seemed to stand still while waiting for someone to make the first move.

Initially, stocks retreated because the Euro broke to a 20-month low. However, they recovered nicely once the Euro bottomed and posted a powerful recovery.

In the cash market, the benchmark S&P 500 Index closed at 2204.71, up 12.76 or +0.58%. The blue chip Dow Jones Industrial Average closed at 19216.24, up 45.82 or +0.24%. The NASDAQ Composite finished at 5310.42, up 54.77 or +1.04%. The popular December E-mini S&P 500 ended the session at 2204.25, up 12.25 or +0.56%.

Investors also followed the comments by New York Federal Reserve President William Dudley. He said he supports gradual interest hikes. He also added that more stimulus could mean the Fed would raise interest rates faster.

St. Louis Fed President James Bullard said properly designed and executed policies to boost infrastructure, modify regulations for some industries and overhaul the tax code “may have some impact…if they are directed towards improving medium-term U.S. productivity growth.”

The market seemed to like the commentary by both Fed officials. And why not? Firstly, stock investors don’t want the Fed to raise rates too quickly and secondly, Trump’s economic plans are likely to work if he is given and follows the proper guidance.

In other news, U.S. Final Services PMI came in slightly lower than expected at 54.6. ISM Non-Manufacturing PMI beat the 55.3 estimate with a reading of 57.2.

Forecast

Unless the brittle Italian banking system starts to flounder, I think investors will put aside the Italian Referendum. However, sellers will act quickly if there is any hint at problems.

In the U.S. investors will be watching the Revised Non-Farm Productivity report. It is expected to come in at +3.2%. The Trade Balance is expected to increase to -41.5 billion from -36.4 billion.

Factory Orders should come in at +2.5%, well-above the previous 0.3%. The IBD/TIPP Economic Optimism report is forecast at 52.3, up from 51.4.

I don’t think the reports will have too much of an impact on the price action today. At this time, a week before the expected Fed rate hike, the price action is likely to be driven by technical factors and value.

For some reason, I feel that investors are propping up the Dow in an effort to reach 20,000 before the end of the year.

The NASDAQ Composite has pulled back nicely and in an orderly fashion and the S&P 500 Index also seems to be leaning to the downside.

If do expect to see a “Santa Claus” rally but I think it may come after there is a pullback into a value area. I keep saying this and keep being proven wrong, but I invest on pullbacks and trade on momentum. Right now, I am thinking like an investors and I don’t like the markets where they currently stand.

Traders should also watch the price action in the crude oil market. There are concerns about the OPEC deal. Not enough to kill the entire deal, but enough to drive prices lower on profit-taking. Additionally, there is an OPEC meeting on December 9 -10 so we may see some profit-taking going into it. A normal retracement of the current rally could bring down the energy sector which could pressure the Dow and the S&P 500.

I know the trend is up, but I can’t find a strong enough catalyst to drive this market higher at this time so I’m going to continue to play for the pullback.