STOCK MARKET OUTLOOK: S&P 500 PRICE MAY BE POISED FOR VOLATILITY AS POLITICIANS DEBATE NEXT CORONAVIRUS STIMULUS PACKAGE AMID PEAK EARNINGS SEASON
- S&P 500 Index starts the trading week on its front foot after holding the 3,200-price level
- Stock market volatility could accelerate in the midst of earnings season and stimulus talks
- VIX ‘fear-gauge’ might signal investor demand for downside protection (or lack thereof)
Stocks just notched a strong start to the week with major US equity indices posting gains across the board. The S&P 500 Index, Dow Jones, and Nasdaq climbed by 0.7%, 1.7%, and 0.4% respectively. Judging by S&P 500 price action, however, equities are still perched beneath last week’s high notched prior to the release of discouraging jobless claims data.
| Change in | Longs | Shorts | OI |
| Daily | -7% | 1% | -3% |
| Weekly | -21% | 23% | -3% |
Nevertheless, a healthy bounce off of the 3,200-price level on the S&P 500 Index looks to underscore this technical support zone going forward. This area of buoyancy seemingly finds confluence with the bullish trend extended through the June 30 and July 14 lows.
S&P 500 INDEX FUTURES PRICE CHART: 4-HOUR TIME FRAME (29 JUN TO 27 JUL 2020)
Chart created by @RichDvorakFX with TradingView
From a fundamental perspective, investors likely steered the stock market higher owing to the prospect of fresh fiscal stimulus from the US government. With less than 100-days until the presidential election, republicans and democrats are currently debating another coronavirus relief bill while crucial unemployment benefits provided under previous stimulus packages are set to expire at the end of the month.
If politicians and central bankers begin to water down and take away the proverbial liquidity punch bowl from a frothy-looking market, not only might this leave hundreds of businesses and millions of Americans struggling without the financial support they desperately need, but it may also spoil the recent S&P 500 rally juiced up on easy-money policies. That said, the Federal Reserve is scheduled to provide markets with its latest interest rate decision on Wednesday, July 29 at 18:00 GMT.
VIX INDEX PRICE CHART: DAILY TIME FRAME (19 JUL 2019 TO 27 JUL 2020)
Chart created by @RichDvorakFX with TradingView
It is likely FOMC officials will leave benchmark rates unchanged near zero, but there is a chance for fresh monetary policy guidance conveyed in anticipated commentary from Fed Chair Powell. Language that hints at further ‘easing off the gas’ in regards to explosive balance sheet expansion could inflict pain on stocks. On the other hand, stated willingness ‘to do more’ and a rosy take on the US economic recovery could give the S&P 500 an added tailwind.
The economic calendar is littered with even more high-impact event risk throughout the week. For instance, a monthly consumer confidence report is due Tuesday, July 28 at 14:00 GMT while second quarter US GDP data is expected later in the week on Thursday, July 30 at 12:30 GMT. This is in addition to the barrage of equity earnings from top S&P 500 companies on tap throughout the week.
As such, the S&P 500 VIX Index, or fear-gauge, could serve as a possible bellwether to where stocks head next. The VIX Index typically holds a strong inverse relationship with S&P 500 price action. If there is a sharp rise in the VIX ‘fear-gauge’ this week, it might suggest a notable deterioration in trader sentiment, and perhaps correspond with an attempt by stock market bears to steer the S&P 500 Index lower.
-- Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
