S&P 500 Weekly Forecast: Choppy trading action expected to continue

Investors of the S&P 500 have managed to get the index back into the green on Friday following three straight days last week and the longest losing streak for the average since mid-September.

The worsening coronavirus data and a lack of US coronavirus stimulus have been problematic for the index.

Democrats and Republicans remain at an impasse over new fiscal aid and new COVID-19 cases have continued to spike over the past week, with infections jumping to the highest one-day level since end-July. 

The seven-day average of new daily coronavirus infections has risen in 39 states, including New York, New Jersey and Wisconsin.

The combination and the countdown to the US election day have drawn attention away from a strong start to the earnings season.

Hospitalization rates have continued to move higher across regions, with the most notable increases in the Midwest and the South. 

Economic activity may slow down a bit as the spread is on a national and the fear is that states may have to reinstate tougher social distancing rules and roll back previous reopening measures.

The point of no return?

According to the weekly jobless claims numbers released last Thursday, they have reached a point where it is hard to remain optimistic.

The Labor Department said US Initial Jobless Claims hit their highest level since August, reaching 898,000 in the week ending October 10.

Lawmakers on Washington for the week ahead will be a major focal point as they continue to struggle over new US fiscal stimulus.

The US President Donald Trump said last week that he was prepared to raise his offer for a coronavirus aid package above the current level of $1.8 trillion.

A $2.2 trillion package was passed by the House and the House Speaker Nancy Pelosi on the White Houses current proposal, that it “falls significantly short”, and markets are concerned that there will be no agreed soon or before the November 3 elections. 

Further delays and constant back and forth between the two parties is feard to result in a negative impact in the real economy as small businesses struggle to stay afloat. 

2020 Elections: Seven reasons why this is not 2016, time to focus on the Senate

A US election result in favour of Democratic presidential candidate Joe Biden is expected to equate to a larger fiscal package which had been buoying markets, however, his lead in the opinion polls had been narrowing slightly over the last week.

President Trump will need to impress in this Thursday’s second and final TV debate to be held in Nashville as the last big opportunity to do this before the Election day.

Between now and then, narrowing in the opinion polls will probably be taken as a negative by risk markets as it will raise the fears of a contested outcome during a potential double-dip recession.

Europe is being priced towards a sharp slowdown

US markets also depending on overseas economic recovery, but the what stands out currently is the divergence between Europe and China which is somewhat troublesome.

Europe is being priced towards a sharp slowdown as the spread of the virus intensifies. The hope of a return to normality is being replaced by much more ominous prospects of a return to lockdown.

Governments have been hesitant to take action that would be politically unpalatable or jeopardize an already fragile economic recovery, but there may be no other choice. 

Hans Kluge, the WHO’s director for Europe, said today that if the current trajectory holds, death rates will be four or five times higher in January than they were in April.

Moreover, the arrival of winter, as well as holiday season, will exacerbate the challenges and the decision being made now will determine the course of the next months ahead.

On a far more positive note, Chinese markets are priced for a V-shape recovery and China's 3Q GDP will be important in Asia's Monday in the absence of key domestic drivers.

US data next week, largely in the form of positive housing data, should not be a game-changer for the US assessment, nor should the Fed’s Beige Book.

Initial claims could receive attention from investor consideration of the poor outcome last week in the build-up to the post-US election Nonfarm Payrolls. 

Meanwhile, talks over further stimulus are expected to divert attention away from the corporate earnings season, which began last week with little impact.

Procter & Gamble, Netflix, Travelers, American Airlines and American Express are among the companies reporting earnings this week.

So far, 86% of companies reporting last week showed better-than-expected earnings, according to data from The Earnings Scout.

S&P 500 chart and levels

The hourly chart shows that the price is on the verge of a run towards filling the gap around a 61.8% Fibonacci retracement and where the 21-moving average is located.

A break above trendline resistance, however, will put the bulls back in the driver's seat to target the all-time highs.