S&P 500 Index: Downside risks pertaining to the winter flu season

The S&P 500 Index fell 2.5% over the holiday-shortened week and is now defending a fall beneath a level seen as pointing to a bearish trend forming in the benchmarks, its 50-day trading average at 3,321.58. Implications of the clash between the flu season and COVID-19 are starkly bearish for the US economy and stock market, FXStreet’s Ross J. Burland reports.

Key quotes

“As Congress fails to pass a replacement relief bill, COVID-19 collides with the flu season, and an economic downturn in the run-up to the US Presidential election are the perfect storm to spark more unrest and a rout on Wall Street.”

“The threat of flu season comes just as the US unemployment rate began to fall sharply in August as some firms began to hire new staff again. However, it was temporary hiring for the US census that boosted the job numbers and the unemployment rate is still much higher than it was in February. Stimulus payments and help for small businesses have been exhausted and negotiations between the White House and Congress over more stimulus are stuck in the mud. For this, we are watching Congress very closely.”

“While prospects for further policy changes are indeed slim, important details on how the Fed is intending to put its new average inflation targeting framework into practice should have the market's attention paid. Inflation forecasts will be of interest as well and knowing just how pessimistic the Fed is for the prospects of a pick-up in inflation over the next number of years. The Fed will need to emphasize that it still has monetary policy tools at its disposal or risk undermining the credibility of the new framework, something that would upset the stock market.”

“S&P 500 is already crossing below its uptrend and a drop of another just 3% would equate to a 10% decline from the peak which is commonly viewed by market technicians as an official correction.”

“While below the 50% mean reversion of the recent drop, the structure there to watch for is between 3200 and 3280. Meanwhile, the price has already fallen to test below the 61.8% of the mid-July rally as well as the prior Sep low 3336. A failure of a restest of between there or 3348, the 61.8% and a 38.2% Fib retracement of the latest downside move, 3355, open immediate risk to the 78.6% Fib that meets the 3280 targets.”