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S&P 500 Outlook: Stocks Flop, VIX Pops on Failed Stimulus Talks

S&P 500 Outlook: Stocks Flop, VIX Pops on Failed Stimulus Talks

Rich Dvorak, Analyst

S&P 500 PRICE OUTLOOK: VIX FEAR-GAUGE JUMPS AS FISCAL STIMULUS TALKS FAIL TO BEAR FRUIT

  • S&P 500 price action pivoted lower from intraday highs as trader optimism for more coronavirus aid faded throughout the trading session
  • House Speaker Pelosi dismissed the latest attempt by Treasury Secretary Mnuchin to reach an agreement on another fiscal stimulus package
  • The VIX Index, or fear-gauge, continues to edge higher as investors seek to hedge against daunting downside risks faced stocks

Stocks closed Thursday’s trading session higher with the S&P 500, Dow Jones, and Nasdaq gaining 0.53%, 0.13%, and 1.42% respectively. The S&P 500 Index extended its advance as major stock indices continue clawing back downside from September’s sharp slide. Returning risk appetite and improving market sentiment seems to largely follow news that US politicians have returned to the negotiating table for discussions on deploying another coronavirus aid package.

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Latest fiscal stimulus talks seem to be going nowhere, however, according to the latest commentary from House Speaker Nancy Pelosi. The $1.6-trillion fiscal stimulus deal proposed by Treasury Secretary Steven Mnuchin on behalf of the Trump administration is still far short of the $2.0-plus trillion price tag sought after by Democrats. Pelosi pouring cold water on the fiscal stimulus deal following a phone call with Mnuchin Thursday afternoon caused stocks to surrender a significant portion of intraday gains.

S&P 500 PRICE CHART: 1-HOUR TIME FRAME (25 SEP TO 01 OCT 2020)

SP500 Price Chart S&P 500 Index Technical Analysis

Chart created by @RichDvorakFX with TradingView

The mounting need for more fiscal stimulus has been echoed by Fed Chair Jerome Powell in recent congressional testimonies. Seeing that stocks hinge largely on accommodative policy from both monetary and fiscal authorities, failure to pass another coronavirus aid package has potential to send the S&P 500 plunging for another look at September lows near the 3,200-price level. That said, lingering uncertainty around whether or not Republicans and Democrats will break the political gridlock likely drove today’s bid beneath the S&P 500 VIX Index, or fear-gauge, as investors hedge against potential downside risks.

VIX INDEX PRICE CHART: DAILY TIME FRAME (25 JUN TO 01 OCT 2020)

VIX Index Price Chart Market Volatility Fiscal Stimulus Talks

Chart created by @RichDvorakFX with TradingView

Though some say technical analysis on the VIX Index is a chart crime, and while there is some credence to that school of thought, I like to argue that patterns and trends of underlying investor demand for downside protection can be observed. On that note, the VIX ‘fear-gauge’ turned sharply higher early last month as stocks embarked on a textbook correction by falling 10% from all-time highs notched in August.

The VIX Index spiked well into the 30.00-handle from the 22.00-level in response, but as equities rebounded thanks to rekindled stimulus negotiations as well as the avoided government shutdown, the VIX subsequently pulled back. Looking ahead, a breach of last month’s low on the VIX Index near the 25.00-mark could signal that investor demand for downside protection is dwindling and risk appetite is rising.

S&P 500 PRICE CHART WITH VIX INDEX OVERLAID: DAILY TIME FRAME (DEC 2019 TO OCT 2020)

S&P 500 VIX Index Price Chart Stock Market Outlook

Chart created by @RichDvorakFX with TradingView

If materialized, this might correspond with a topside breakout by the S&P 500 above technical resistance at the 3,400-price level given the inverse relationship generally held by the S&P 500 and VIX Index. Yet, it is worth mentioning that the S&P 500 to VIX Index 20-day correlation recently turned positive as it did mid-January and late-August. In turn, this could be sending a bad omen to stock market bulls if history is to repeat itself.

Also, the VIX Index currently gravitates around its now positively-sloped 50-day moving average. Expected market volatility has potential to stay relatively elevated around current levels in light of glaring uncertainty that stems from the US presidential election right around the corner. Not to mention, October is historically the most volatile and worst performing month for the S&P 500 Index, which poses an additional headwind for stocks.

Keep Reading: US Dollar Bounces Off Support Amid Key Economic Data Releases

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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