S&P 500; US Indexes Fundamental Forecast – December 8, 2016

After several days of consolidation and a slow drift higher, the U.S. major indexes finally broke out to the upside on Wednesday. Some say the catalyst behind the price surge was the anticipation of further stimulus from the European Central Bank on Thursday.

In the cash market, all three major indexes hit new all-time highs. The Dow Transports hit their first intraday high since 2014 and closed at an all-time high.

The benchmark S&P 500 closed at 2241.35, up 29.12 or +1.32%. The Blue Chip Dow Jones Industrial Average ended the session at 19549.62, 297.84 or +1.55%. The tech-laden NASDAQ Composite finished at 5388.57, up 55.57 or +1.04%. The popular December E-mini S&P 500 Index closed at 2236.75, up 26.75 or +1.21%.
The rally was driven by a combination of fresh buying and short-covering and proved to investors that the momentum from the Trump rally is still present. All key areas were up including the financials, transports, steel stocks, and small and mid-cap stocks.

The price action suggests there was very little selling.

Forecast

I have at admit that despite my confidence in an end of the year “Santa Claus” rally, I didn’t see Wednesday’s rally coming from a fundamental standpoint. Technically, it was there for the taking for momentum and trend traders.

The size of the move is a strong indicator of the amount of cash that is still on the sidelines held by the major money managers, who have it ready for their disposable. This is information I’d like to get my hands on.

I tend to look at risk and prefer to buy dips for long-term investing. This is probably why yesterday’s move caught me by surprise. It suggests that money managers are willing to extend their risk parameters by buying strength instead of dips and this is something the markets haven’t seen in a long time.

On Thursday, the early focus will be on the ECB. It is widely expected that the central bank will extend its quantitative easing program beyond 2017. The odds of this taking place increased after Sunday’s referendum in Italy left the country’s banks in a vulnerable position.

Traders should keep in mind that ECB President Mario Draghi tends to deliver more than expected. So we have to conclude that Wednesday’s rally was probably in anticipation of this taking place. If Draghi disappoints then we could see a sharp correction.