S&P 500 Weekly Forecast: Out with the old 2020 vol, in with the new 2021 vol

For a quick recap of the closing action on Wall Street for 2020,  US stocks ended higher on New Year's Eve, with the Dow and the S&P 500 ending at record levels.

The Dow Jones Industrial Average gained 0.7% to 30,606.48 and the S&P 500 edged up by 0.6% to 3,756.07, while the Nasdaq Composite was slightly higher at 12,888.28. 

 2020 marked both the end of the longest bull market and the shortest-lived bear market ever.   

After starting the year at historic levels, markets melted significantly over the COVID-19 pandemic before recovering into unchartered territory on stimulus packages and COVID19 vaccine rollouts. 

The volatility for 2020 saw the Dow advance some 7.2% while the S&P added 16.3% and the Nasdaq ended a colossal 43.6% higher.   

Volatility is what traders need and it will likely continue in the New Year from the get-go; Out with the old vol of 2020, in with the new for 2021.

While it could be a sleepy start to the year as traders emerge from the holidays over Monday and Tuesday, Wednesday could well be expected to really kick off the first volatility for the year.

Stocks will be expected to respond in kind to the high-stakes Jan. 5 US Senate runoffs in Georgia for the balance of power in Congress.

However, traders will also need to take note of additional risks abound, including a resurgent coronavirus pandemic and the concerns about the speed of rollout of vaccines.

The options market is pricing in more volatility in January than December, likely due to the Georgia elections.

If Republicans win at least one Senate seat, they will maintain a slim majority and the S&P 500 will enjoy the prospects of there not being much in the way of a possibility of major tax-reform.

However, the opposite would be true of the Democrats sweeping the dual runoffs.

Under such a scenario, the chamber would be split 50-50 and the tiebreaking vote would go to Vice President-elect Kamala Harris, giving President-elect Joe Biden's party full sway over Congress.

Nevertheless, the Federal Reserve has suggested interest rates will remain near zero through 2023, which should take some sting out of the tail of any upheaval in tax reform.

Covid immunisation has a lot of catching up to do

Moreover, the roll-out of coronavirus vaccines has emboldened investors, a trait in the market that would be expected to continue as widespread inoculation kicks into high gear in the coming weeks.

Bank of America biopharmaceutical analysts forecast roughly 200 million healthcare workers and elderly people will receive vaccines from either Moderna or Pfizer and BioNTech "over the coming months" following their emergency use authorizations in the United States, Europe and Japan.

By H2, ''everyone in these three markets who wants a vaccine should be able to receive one, the bank predicted,'' forecasting that 1.65 billion of global coronavirus vaccine doses will be distributed in 2021. That number is just a fraction of the several billion doses vaccine-makers, such as Moderna or Pfizer and BioNTech,  are currently estimating they'll produce.

However, optimism could well take a knock pertaining to the elevated numbers of Covid-19 cases and hospitalizations as the new year gets started. 

In the race between virus and vaccines, immunisation has a lot of catching up to do. The COVID-19 death toll in the United States has now surpassed 350,000 and experts anticipate another surge in coronavirus cases and deaths following the holiday gatherings.

Johns Hopkins University's data shows the US passed a threshold early Sunday morning with more than 20 million people in the country that have now been infected.

Against a backdrop by which the rollout of the inoculation program has been criticised as being slow and chaotic, investors may wish to pull in the reigns a little on their optimism for the start of the year.
Some investors fret that the COVID-19 recovery may already be priced in and valuations may be stretched.

A surge in holiday borne cases could be the straw that breaks the camels back, and if Wall Street is banking on immunizations to halt the virus, it could be in for a rough surprise.

The IBD/TIPP Poll found that just 52% of Americans are likely to get a Covid-19 vaccine. An additional 41% say they'll refuse, and more than a third are sceptical of the vaccines.

The worst of the surge could still be ahead of us as this is also the first holiday period in which the new, more transmissible variant of the virus, first found in Britain, was known to be circulating in the United States.

“It’s terrible, it’s unfortunate, but it was predictable,” Dr. Anthony S. Fauci, the nation’s top infectious disease expert, said on “Meet the Press.”

“Things are bad enough as they are right now,” Dr. Fauci said, “but they could get worse in the next couple of weeks.”

In such a scenario, this would all point in one direction.

There would be a combination of strict lockdowns and that would be optimal for tech/online stocks.

However, beyond that, should there be a handle on the stemming of the spread of the virus, then positive sentiment would likely see a rotation story away from tech for 2021. 

S&P 500 technical analysis

From a weekly perspective, we have a W-formation from which a correction to test the neckline and confluence of the 38.2% Fibonacci would be expected at 3,550.

From a daily perspective, the 21-day moving average meets the 38.2% Fibonacci retracement level of the latest bullish impulse at 3,700.