S&P 500 Index Weekly Forecast: Stimulus, US politics and NFP in the mix, consolidation expected on the chart

  • S&P500 survives the test of correction territory as Democrats keep hopes of stimulus alive.
  • The clock is ticking for a pre-election relief legislation.
  • Technically, 3200 could hold the test of time and force the index into consolidation and a reverse H&S.

The Standard & Poor's 500 Index fell 0.6% last week, marking its fourth consecutive weekly drop and its longest weekly losing streak in a year.

The S&P500 is now down 8% from the record high reached Sept. 2 and was down by as much as 11% at Thursday's intraday low.

Last week, the index was marking a brief trip into correction territory but it hasn't closed at or beyond the 10% threshold that marks an official correction. 

As for individual sectors, energy had the largest percentage drop last week, down 8.6%, followed by a 4.6% slide in materials and a 4.2% decline in financials.

The technology sector remained an outlier as stocks improved amid increased demand during the pandemic. 

Fears of a slowing economy and a defunct US fiscal stimulus plan have sparked an almost month-long rout.

Investors, all of a sudden, find themselves with depleting fuel repositories to keep the Fed's balance sheet expansion rally burning. 

Fed's warnings of a lengthy recovery

To add insult to injury, the final full week of the month was brimful of Federal Reserve officials expressing their concerns of the spread of the virus and warnings of a lengthy recovery. 

Federal Reserve Bank of Chicago Chief Charles Evans warned Thursday that a failure to restore government support during the coronavirus pandemic will bring considerable pain to the economy.

Reduced unemployment insurance benefits and pullbacks in other aid “will test the true resiliency of the US economy,” Evans said.

With the window to strike a deal closing, Fed Chair, Jerome Powell, also expressed that a failure to follow up on the success of the Coronavirus Aid, Relief, and Economic Security (CARES) Act could cause deep economic devastation. Powell said:

If people start to run through it what resources they have, they're at risk of losing their homes or having to move out of the place they're renting, maybe move back in with family, and those things are not necessarily good for controlling the spread of the virus.

The CARES Act really did a lot of good in putting money in people's hands and keeping them in their homes and keeping them spending, keeping them in one piece. Going forward, more of that may be needed.

The clock is ticking down towards the November 3rd presidential election day and Republicans and Democrats have just a handful of weeks to work out a new bill if they want to pass it ahead of the election. 

Democrats to table a new proposal for a fresh relief package

However, stocks may get a boost to start the week considering the Democrats are planning to table a new proposal for a fresh relief package this week. 

Although the House is scheduled to go on recess on 2 October to allow lawmakers to focus on the elections, House Speaker Nancy Pelosi has said the chamber will remain in session until a bill has been agreed.

Pelosi has confirmed she is willing to reopen negotiations with the White House but the latest draft remains in a financial region Republicans have so far been reluctant to contemplate.

Democrats have lowered their expectations from the $3 trillion laid out in the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. 

Pelosi has consistently pointed out that the Democrats have offered to meet the Republicans halfway and the latest package is expected to be worth around $2.4 trillion in total.

However, Treasury Secretary Steve Mnuchin and Chief of Staff Mark Meadows have said the White House cannot consider such an amount. 

The content of the proposal may ultimately be the key to unlocking the process above the terms of the eventual spend.

If, on the other hand, the prospect for pre-election relief legislation starts to disappear over the horizon, stocks will surely struggle to retain the traction they started to make on Friday. 

Nonfarm Payrolls in focus 

Looking ahead for the week, US Nonfarm Payrolls will be up there as one of the main events. Analysts at TD Securities explained: 

Payrolls probably rose fairly strongly by pre-COVID standards, but with the pace slowing again, and the level still down around 11mn since February. 

We are assuming a 200k decline in government payrolls, due largely to weak education hiring at the start of the school year. More positively, the initial manufacturing survey data for September point to another solid ISM reading.

SP500 technical analysis 

Last week's projection:

As illustrated in last week's analysis above, 3200 was a level that was expected to be reached. 

The chart below shows that the level was good:

For the week ahead, a reverse head and shoulders could be in the making on the daily chart:

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