When it comes to investing, you always want to be on the lookout for opportunities where the potential upside looks greater than the downside. And right now, the S&P 500 may be one of those – at least for the next few months. Let’s take a look at the five factors that are likely to drive the key US stock index higher between now and the end of the year…

1. Money Movement Direction

There is likely to be a surge in buying interest in the index, mostly driven by three types of market players. First are the rules-based traders known as Commodity Trading Advisors (CTAs): they’ve been overall betting against the index for a long time, and Goldman Sachs estimates we could see more than $200 billion in buying from these types of investors if the S&P 500 climbs from here. CTAs are trend-following, or systematic traders, who buy and sell based on price level breaks.

Second, on the list are corporations–they’ve been ramping up their purchases of their own shares through buybacks lately. Goldman estimates that we’ll see a hefty $190 billion in this kind of buying over November and December, or about $4.5 billion a day. Third are global investors–with the recent collapse in Chinese stock markets, they’re likely to redirect their capital back into U.S. equity markets, which look like the “cleanest dirty shirt” compared to other options.

2. Speculation

Positioning among speculative traders is significantly net short, which means that these players have been betting that the S&P will fall. So, one of two things is likely to happen from here. With so many short positions already in place, that could limit how much lower these assets could fall, simply because there are fewer sellers.

On the other hand, the large number of traders who are short a particular stock could lead to a short squeeze. In this scenario, the rising price would force those traders to rapidly buy the stock back in order to close out their positions. This could result in sharp upside price moves.

3. Technical Side

Historically speaking, November and December are where it’s at for stocks. 

In a midterm US election year, the two months’ returns tend to be even better, with a median gain of 3% over the past 90 years. Plus, the S&P 500 flashed a reliable signal at the end of September: its price had dipped to 20% below its 200-day “simple moving average” – i.e. the average price over the past 200 days. Over the past 100 years, that signal was followed by positive returns – except in 1931, 1937, 1974, and 2008.

The returns during a midterm US election year (like this year) tend to be even better, with a median gain of 3% over the past 90 years. Even if you include those troublesome years, the median return three months after that signal was at an attractive 7.6%.

What’s more, a look at how many S&P 500 stocks are trading above their own 200-day simple moving averages shows that only around 20% were doing so in late September. This is a low seen on only 15 occasions since 1998. Averaging out the returns seen three months after each of those occasions reveals a healthy 4.6%. And lastly, leading indicators of risk-on market behavior are looking good, with high-yield bonds, the smaller-cap Russell 2000 stock index, and bitcoin all trading higher.

4. Fundamentals

In terms of economics, bad news is actually good news. When economic data is weak, it increases investor expectations that the Federal Reserve (the Fed) might pause in its aggressive rate-hiking campaign, which would be seen as positive for stocks. However, indicators have been mixed.

Despite some promising signs, underlying economic weakness may be indicated by forward-looking metrics like the purchasing managers index.

It’s earnings season for corporations, and although they appear to be holding up well, the stock prices of large tech companies (except for Apple) have been absolutely hammered. Nonetheless, the S&P 500 has been resilient overall, closing higher for the second week in a row. This should give you further confidence that a bullish move is likely.

5. The Fed & Interest Rates

The most important thing driving markets this year is Fed expectations. Recently, those have begun to shift, with an increasing expectation that the central bank might become more “dovish” after a string of “hawkish” rate hikes. This more dovish outlook is driven by several factors, including a Wall Street Journal article suggesting a shift among Fed officials, and public comments from San Francisco Fed President Mary Daly.

As other central banks begin to ease up, will the Fed be the last domino to fall?

Investors appear to be preparing for a slowdown in Fed rate hikes, which has led to a dip in the key interest rate that equities are valued off of – the US 10-year Treasury yield. This, in turn, has helped to lift the S&P 500 index. Just last week, the three-month-to-ten-year yield curve inverted, a sign of worries among investors and something the Fed considers an important metric in evaluating whether or not they’re doing enough.

What could “Rain on The Bulls Cabriolet” Here? 

Though the S&P 500 looks set to rise, there are still some risks that could scupper the rally. Here are three things to watch out for.

Firstly, a major escalation in the Russia-Ukraine conflict could trigger a stock sell-off and a surge in energy prices. Secondly, a rise in Treasury yields and interest rates could put the brakes on the rally. And finally, next week’s inflation report could disappoint investors.

A break below the closely watched 3,550 support level for the S&P could rattle a stock investor’s resolve and keep them from buying. This would be a revisit of the October 14th lows of 3,490. Any one of these factors could have a negative effect on stock market.

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