The decade-long uptrend of the S&P 500 (SPX) is being threatened on multiple fronts. Issues such as the U.S.-China trade spat, weak manufacturing data and the possibility of President Trump’s impeachment make it difficult for the bulls to dominate the stock market. Thus, it is not surprising that some traders have a bearish take on the index.
Nevertheless, recent developments from the Federal Reserve involving the resumption of asset buying is giving bulls the ammunition that can drive the SPX higher. JM Vala, co-founder of LayupTrades, believes that the policies of the Fed will likely send the S&P 500 to new highs this fourth quarter.
JM Vala: Expect Volatility This Quarter
The day trader is bullish on the stock market. However, he believes that the road to a new all-time high comes with multiple obstacles. Therefore, it is likely that the S&P 500 will be volatile as market sentiment oscillates due to economic and political news that can impact price. In an interview with CCN, Vala said,
Typically, we see Q4 as seasonally bullish. However, there is still a lot of news flow that can have a push/pull on price.
Earnings for major companies begin next week, and we have exogenous headlines which affect the market several times a day with U.S./China trade issues, the impeachment threat, as well as the President’s back and forth with the Federal Reserve. While these issues remain on the table, and I expect them to, we should continue to see a VIX that remains elevated from statistical norms.
The VIX that the trader refers to is the market index representing the expected volatility of the S&P 500. Yesterday, the VIX closed at 17.57, which is slightly below the norm and it shows signs of trending up. If the threats mentioned by JM Vala persist, they may act as catalysts that can push volatility to the extreme.
The good news is that the trader expects the volatility to be on the upside. JM Vala stressed,
While all of these issues pose risk, it’s hard to be bearish while price holds the consolidation range which it has been in for over a year now from 2800-3000.
The Federal Reserve Holds the Key to New Highs
As Mr. Vala said, the S&P 500 has been stuck in a 200-point range for more than a year. The environment has been frustrating for both bulls and bears. That’s because the market is failing to provide clarity regarding its long-term direction. However, that might change very soon.
According to Vala, there are a couple of factors that can stimulate market growth. The analyst said,
The high put/call ratio, and the next FOMC meeting which is slated toward the end of October, in which I expect, we will hear some more mention of accommodative policies which the Fed will implement, specifically another round of quantitative easing, or whatever dramatic term they give to the resumption of the increase in their balance sheets.
The latter is likely to have a more dramatic impact on the stock market.
Over the last few weeks, we’ve been writing about the global dollar shortage, which has been a thorn on the side of the repo market. While liquidity issues were visible in the overnight lending market, we also see the cash shortage as a major hindrance on the bulls’ push to make new highs. After all, financial institutions can’t buy more stocks if they’re strapped for cash.
The fresh capital injection from the Fed may embolden the bulls to break out of range and take the S&P 500 to new highs.
Our interview with the co-founder of LayupTrades ended with a daring call. The trader said,
I have a target for the S&P of 3150-3250 for Q4, if we do see a break of this consolidation range.
Disclaimer: The above should not be considered trading advice from CCN.