S&P 500; US Indexes Fundamental Forecast – May 2, 2017

After some indecision early Monday due to weak economic data, stocks recovered from their lows in reaction to comments from President Trump.

In the cash market, the benchmark S&P 500 Index finished at 2388.33, up $4.13 or +0.17%. The blue chip Dow Jones Industrial Average closed at 20913.46, down $27.05 or -0.13% and the tech-based NASDAQ Composite ended the session at 6093.59, up 45.98 or +0.76%.

Stock traders had a mixed reaction to U.S. economic news on Monday. Weak factory and inflation data failed to boost expectations for a June rate hike from the Federal Reserve. The Personal Consumption Expenditures (PCE) Index excluding food and energy slipped 0.1 percent in March, the first and largest drop since September 2001. In the 12 months through March, the so-called Core PCE Price Index increased 1.6 percent, the smallest gain since last July.

The Core PCE is a very important indicator because it is the Fed’s preferred inflation measure. Its 1.6 percent read puts it on the weak side of the Fed’s 2 percent target.

Additionally, the ISM said its index of national factory activity dropped to a reading of 54.8 last month, the weakest reading since December. Investors were looking for a read of 57.2. Construction Spending in March also fell from a record high last month.

The price action was mixed later in the session following comments from President Donald Trump about breaking up the big banks. Trump said he is “looking at that right now,” in an interview with Bloomberg News.

Forecast

Despite the mixed close, the price action suggests investors are stuck between risk on and risk off. Prices are at lofty levels, but investors feel it may be too early to sell. They are probably worried about missing more potential earnings gains.

I don’t think investors will be willing to push the upside on Tuesday with the start of the Fed’s two-day meeting so we could see sideways movement today. However, traders should watch for comments from Trump because he seems to have the ability at this time to move the markets.

The market is set up for further upside action, but whether we reach new all-time highs in the Dow and S&P 500 will be determined by investor willingness to jump in front of the Fed. Earnings season continues this week with Apple, Facebook, Tesla and BP all reporting so investors will have news backing them if the reports beat the estimates.

Early Warning

On Monday, Wall Street’s “fear gauge” did something it hasn’t done in more than 10 years. The CBOE volatility Index or VIX hit a low of 9.90 during trading, its lowest level since February 2007. Start watching this index because it is a complacency indicator. In other words, it could be indicating that investors are approaching the long side of the market without any worries.