S&P 500 Weekly Outlook: Prospects for all time highs just got bigger

As the S&P 500 approaches fresh highs, with investor hopes for fiscal stimulus rise as the stalemate in congress endured, the US President Donald Trump, in a tactful political move, may have just sewn the seed for the final push to the line this weekend. 

Following a better than expected outcome in the Nonfarm Payrolls on Friday, which in itself was positive for US stocks, from his Bedminster, N.J., golf resort on Saturday, President Trump signed four executive actions to provide economic relief amid the coronavirus pandemic.

While it been telegraphed and likely priced in, that a payroll tax, student loan interest and rental eviction were on the cards, Trump added a surprise executive order on unemployment benefits.

The move will improve risk sentiment and an appetite for US assets as it likely improves his reelection chances after failing to secure an agreement with Congress.

The previous enhanced unemployment benefits, which added $600 a week to standard state unemployment benefits, expired at the end of July. However, legal challenges are expected, which could delay any disbursement of funds.

In the memorandum, the president has authorized the federal government to pay $300 per week for people on unemployment. States would be asked to pay an additional $100, for a total of $400 weekly for unemployed workers

"If they don't, they don't. That's up to them," Trump said when asked what happens if governors don't have the funds available.

On the flipside, lest we forget, Trump also escalated trade tensions with both China and Canada last week and there is arguably more uncertainty about the future of the economy and markets swirling around than answers.

The COVID-19 pandemic ranks tops among a list of concerns which may provide the US equities with limited further support as the US is at the centre of many global risks right now.  

Recovery from the COVID-induced plunge in global economic activity earlier this year has been progressing somewhat faster than what markets had been expecting.

However, the lack of an effect on US stocks of the second wave of the virus reflects that it has not influenced 2021 growth expectations, which has been a plus for Wall Street which walks into this week against a bullish backdrop. 

What to watch for

An agreement on the US relief package, fierce retaliation by China and more data feeding into the reflation narrative may all be on the cards next week. 

However, investors are really sinking their teeth into the negative US real yield story ahead of the 16 Sep FOMC meeting. This has seen the dollar drop within its 5-year range and precious metals spike to all-time highs and higher US equities. 

However, the banking sector has been indicating that something here is not right, which should stay on the radar. The KRE index is attempting to recover to the 40 level which is a prior resistance and one to watch. 

Inflation data and Retail Sales will also be important in the week ahead.

The CPI likely rose strongly while Retail sales likely slowed after huge gains in May and June.

For CPI, analysts at TD Securities explained that they expect unwinding of some of the March-May plunge in travel-related prices to outweigh slowing in rents.

That said, we think the slowing in rents is more indicative of the trend in the year ahead. The YoY pace in core prices likely remained low at 1.2% in July.

For Retail Sales, the analysts said that a sizable gain in autos has been signalled by the units data, while gasoline spending was probably boosted by higher volumes as well as prices.

We expect more slowing in the data for bars and restaurants and the control series.

Also, the VIX is on the decline and the put to call ratios are supporting prospects of a fresh all-time high.

The VIX, has been trading above its historic long-run average at 19.3 since late Feb and hit an all-time high above 80 in March, a week before stocks hit a recent nadir on March 23.

It closed at 22.21 on Friday in a series of consecutive lower lows since 3rd Aug and is now the lowest it has been since Feb's spike. 

Then, the US dollar could be a headwind for stocks. If the dollar finds demand on the prospects of a smaller deficit pertaining to Trump's executive orders over the weekend, coupled with the potential to a CPI data surprise to the downside and geopolitical risks, then it could bleed over to the gold and equities correlation. 

In the coming week, there are also some final earnings of the season which will include technology company Cisco and food company Sysco as well as some travel companies including Royal Caribbean report, as does consumer goods company Tapestry.

In the week after, big retailers roll out their reports in the final earnings burst of the quarter.

S&P 500 market structures

The bulls are in charge and prospects are for fresh highs.

However, a healthy correction at this juncture cannot be ruled out. A 38.2% Fibonacci retracement correlates with the tops of the prior bullish weekly impulse.