S&P 500 Index Weekly Forecast: Benchmarks correcting as COVID cases surge

Wall Street suffered its first three-week drop in almost a year as investors continued to cut back on high flying tech stocks that have been responsible for the quick rebound out of the pandemic bear market.

High profile names like Amazon (AMZN), Facebook (FB) and Apple (AAPL) have slumped sharply after hitting record highs. The sector’s rout led the Nasdaq to its worst levels since July 31 and contributed to in the S&P's six week low.

With researchers around the world racing to develop a vaccine, the optimism has dimmed and investors have been spooked by the spike in new coronavirus cases in several European countries.

This has encouraged some profit-taking, adjustments and rotation between sectors, or a rebalancing act between the biggest weights in the market to the smallest weights.

Attention returns to the prospects of more fiscal assistance given a loss of momentum in the economic data. The problem lies with Senate Republicans .

The equity rally and President Trump’s executive orders have bought them time but the question is whether it will take a steeper stock market correction or acceleration in unemployment to spark action.

The froth of the markets has been swiped off partly due to the highly anticipated Federal Reserve meeting that eventualised into a slightly less dovish than hoped for outcome.

This all comes just as early voting for the November 3 election will begin for several states over the coming week.

US economy needs further fiscal support

Meanwhile, the surge in new coronavirus cases comes just after the summer vacation season, as workers return to city centers and children go back to school in what is expected to be a troublesome flu season.

The World Health Organization has suggested the recent increase could be partly down to the relaxation of measures and people dropping their guard.

To date, the US has reported 6.7 million cases and 198,000 deaths in a population of 330 million but the numbers are expected to rise significantly as colder weather sends more people indoors, increasing the risk of spreading both Covid-19 and the flu.

Health experts have said Covid-19 colliding with flu season could strain health care capacity, partly because in normal years many Americans are hospitalized with flu.

The impact on consumer spending habits going forward will be a critical factor for the stock market as a second wave will slow the reopening of the economy.

The US economy cannot continue to rebound indefinitely without further fiscal support while millions remain out of work.

Price action has ready started to reflect how investors, who have bid up stocks relentlessly since late spring, are now rethinking prospects for a sharp economic rebound in the wake of a still raging pandemic with no immediate fiscal boost on the table.

As a result, Wall Street economists have become less sanguine about a rescue package, and more pessimistic about growth prospects for the remainder of 2020.

At this point, a major stimulus package before the election looks like a long shot and Congress is looking less and less likely to be extending the extra unemployment insurance payment by the end of September.

Last week, the Fed signaled that near-zero interest rates will be around for at least the next three years, as the US economy continues to face risks around the ongoing pandemic.

However, Fed officials suggest that the quicker-than-expected early economic recovery could be jeopardized by the absence of more fiscal support.

There have been no hints that the QE program will be changed soon to provide more stimulus, although wording on QE has been changed to make clear that a primary goal is to provide monetary stimulus broadly.

What the stock markets want to see is an enactment of the sort of package that President Trump or Speaker Pelosi have both endorsed, although Washington’s deadlock means hopes are waning for cash-strapped states. As such, this is undermining growth prospects in the last quarter for 2020.

Then, we have the additional uncertainty of the US elections and early voting for the November 3 election will begin for several states over the coming week, including in key battlegrounds Michigan and Minnesota, as well as in Illinois and Virginia.

Joe Biden maintains a sizable 7pp lead in national polling over President Trump ahead of the first presidential debate on September 29th.

The focus for the week will be on a flurry of Fed speakers, starting with Chair Powell testifying to a congressional subcommittee on the central bank’s response to the pandemic.

Mester and Rosengren will also be speaking at virtual events.

However, as far as details on the new average inflation target go, it appears that the US stock market will have to be satisfied with the vague wording we got in the September meeting.

S&P 500 technical analysis

We had seen an explosion in volume related to the sell-off to at least the 50-day moving averages in the benchmarks.

The S&P 500 is already crossing below its uptrend and it is now close to a 10% decline from the peak.

A 10% fall is commonly viewed by market technicians as an official correction. 

The structure to watch for is the 61.8% Fibonacci around 3200 to the downside:

Weekly chart