Bull markets usually recover when pessimism is off the charts and everyone expects the continuation of the correction. Is it time for S&P 500 bulls? When is the right time to buy the stock index? Let’s talk about this topic and draw up a trading plan.
Weekly S&P 500 fundamental forecast
Life is cyclical. The black stripe gives way to white. Pessimism is giving way to optimism. Downtrends occur when there are too many bears in the market. Something similar is currently happening with the S&P 500. The broad stock index is down 9.5% from its July highs and will hardly reach the Wall Street consensus estimate of 4,370 for the end of 2023. To meet the forecast, the S&P 500 needs to gain about 5% over two months. However, seeing how quickly the number of bears is growing gives the stock market hope.
Dynamics of S&P 500 and stock index forecasts
The cumulative effects of the Fed’s most aggressive monetary tightening in decades, the highest Treasury yields in 16 years, and armed conflict in the Middle East are forcing banks and investment firms to revise their S&P 500 forecasts downwards.
Thus, the main Wall Street bull, Oppenheimer, who previously set a figure of 4900, lowered it to 4400 and said that geopolitics and high borrowing costs press down the stocks. Bank of America, Goldman Sachs, and Citigroup, which raised their forecasts in June-September after failing to predict the rally earlier in the year, proved to have been wrong. At the same time, bearish JP Morgan and Morgan Stanley draw investors’ attention to inflated earnings estimates for S&P 500 companies.
Dynamics of the S&P 500 without considering capitalization and expected profit
In fact, the S&P 500’s downtrend began at the same time that the rally in Treasury yields accelerated and the US dollar strengthened. These processes were based on the same events: a surprise from the Treasury, which announced the issue of Treasuries for more than $1 trillion in the third quarter, and the market’s rejection of the idea of a Fed dovish turn amid a stronger economy. Since then, good news has turned bad for the stock market, but the situation could change in early November.
The Treasury intends to auction bonds for $776 billion in the fourth quarter of 2023 and $816 billion in the first quarter of 2024. The first figure was lower than expected, which reduced Treasury yields, which could have reached its ceiling. S&P 500 bears have been deprived of one advantage, and the Fed may take another one. At the FOMC meeting on October 31 – November 1, the central bank will try to slow down debt market rates further and will focus on a data-driven policy. And the US domestic data will worsen sooner or later.
Weekly S&P 500 trading plan
The US jobs report could result in turmoil in financial markets. Signals about the cooling of the US economy will increase the chances of the Fed easing its monetary policy in 2024. The expectation of a Fed dovish turn amid stabilizing Treasury yields will support the S&P 500 growth. The stock index reaching the target of 4140 on the previously suggested shorts allowed traders to take profits. A price rise above 4177 will be a reason to buy.
Price chart of SPX in real time mode
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