US Stocks Outlook

• The S&P 500 rises for the third consecutive session, but its bullish momentum appears to weaken.
• Meanwhile, reopening stocks surge on news that three doses of Pfizer (PFE) and BioNTech’s (BNTX) vaccine provide protection against the omicron variant.
• November U.S. inflation data and Fed monetary policy decision will be in focus in the coming days.

After the solid rally of the past two sessions, Wall Street lost some of its shine and turned in a soft performance on Wednesday as investors grew a little more cautious ahead of Friday’s critical inflation data and next week’s FOMC decision. When it was all said and done, the S&P 500 gained modestly 0.31% to end the day at 4,701, while the Dow Jones edged up 0.1% to 35,755. Elsewhere, the Nasdaq 100 climbed 0.42%, finishing the day at 16,394.

Although the main averages traded with a slight neutral bias, reopening stocks exploded upwards, rising broadly on news that three doses of Pfizer and BioNTech’s vaccine provide protection against the COVID-19 Omicron variant. In this context, travel and leisure shares posted big gains, with United Airlines Holdings (UAL) up 4.26% and Norwegian Cruise Line Holdings (NCLH) up 8.2% at the closing bell.

Stocks tied to the reopening of the economy may have room to climb further in the medium-term if the Omicron strain proves to be a false alarm and the health crisis begins to resolve quickly in 2022.

Having said that, airlines and cruise operators, whose stock prices have plummeted in recent months, remain attractive and could continue to play catch-up with the broader market upon returning to profitability, though the journey higher may be bumpy and volatile.

At the index level, there may still be upside potential, but leadership may shift toward value rather than growth and tech. These dynamics may benefit the blue-chip Dow Jones to the detriment of the S&P 500 or Nasdaq 100. In fact, the latter two technology-heavy benchmarks may come under increasing pressure once the Federal Reserve begins to pull back support more rapidly in the coming months.

Focusing on the Fed, the central bank will release its last monetary policy decision of the year next Wednesday. No changes to interest rates are expected, but the institution may announce a plan to accelerate the process of reducing bond purchases amid mounting inflationary pressures.

Given that a quicker QE tapering scheme can pave the way for earlier rate hikes, traders should carefully watch what policymakers say about lift-off and what the updated dot-plot shows in terms of tightening.

To better understand how the Fed may proceed, it is vital to follow Friday’s November consumer price index report. Investors expect headline CPI to rise 6.8% year-over-year from 6.2% year-over-year in October, and the core indicator to increase 4.9% year-over-year from 4.6% year-over-year in the prior month.

If inflation results surprise to the upside or details reveal that the stickier CPI components are growing too aggressively, markets should prepare for a more hawkish Fed next week, an outcome that could spark volatility and weigh on stocks, particularly those with high valuations.

US S&P 500 Sentiment: Bearish. Data provided by IG. 56% of clients are net short.

S&P 500 Technical Analysis

After rallying substantially at the start of the week, the S&P 500’s momentum appears to be moderating, but technical signals remain positive, with the index stuck in an ascending channel and trading above its 50, 100, and 200 SMA.

However, for bullish impetus to reassert itself, buyers must push the price above the all-time high of 4,744. Should this scenario play out, the S&P 500 could be on its way to test the channel’s upper boundary near the 4,800 psychological level.

Alternatively, if sellers resurface and the index begins to pull back, support appears at 4,630, though a drop below this floor could trigger a move towards the 50-day simple moving average near 4,550.

S&P 500 Technical Chart

S&P 500 (SPX) Chart by TradingView