The S&P 500 Is Stuck in a Slim Range

The S&P 500 and other indexes may stay range-bound until after the November elections

On Friday, the major indices rallied, cutting what appeared to be a loss for the week resulting in gains for each of the major averages.

But shares of biotechs and pharmaceutical companies fell following presidential candidate Hillary Clinton’s proposal to allow government officials to impose penalties on what they considered “unjustified prices increases” on older products. Mylan NV (NASDAQ:MYL), maker of EpiPen, fell 4.7%, and exchange-traded fund iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) fell 0.29%.

Despite a disappointing Employment Situation report for August, in which just 150,000 nonfarm payrolls were added (180,000 expected), the market rallied in anticipation of another delay in the hiking of rates by the Federal Reserve. Utility stocks, which fell over 6% in August, recovered some of that loss on Friday as they rallied up 1.2%.

The dollar rose on Friday, up 0.1% vs. a basket of 16 currencies. Crude oil (WTI) rose 3% to $44.44 per barrel and gold rose 0.8% to $1,322.10per ounce.

At Friday’s close the Dow Jones Industrial Average gained 73 points at 18,492, the S&P 500 rose 9 points to 2,180, the Nasdaq gained 23 points at 5,250, and the Russell 2000 closed at 1,252, up 12 points. The NYSE’s primary exchange traded 803 million shares, with total volume of 3.1 billion shares. The Nasdaq crossed 1.5 billion shares. On the Big Board, advancers outpaced decliners by 4-to-1, and on the Nasdaq, advancers led by 2.3-to-1.

For the week: The DJIA gained 0.3%, the S&P 500 rose 0.3%, the Nasdaq was up 0.5%, and the Russell 2000 forged ahead by 1%.

S&P 500 Narrow Trading Range
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Since the Brexit sell-off and reversal that resulted in a two-week advance, the S&P 500 has been stuck in the very narrow trading range at about 2,155 to 2,190. Last Thursday’s low at 2,157, which anticipated the Fed action due to projections of stronger jobs data, tested the support line.

But Friday’s rally to within five points of the top of the range confirmed the significance of a break in either direction.

Conclusion: Very low volume usually produces high volatility. Instead, despite uncertainty over the Fed’s inaction on a rate hike, weaker-than-expected crude oil prices, the possibility that several other members of the eurozone will vote to leave, military threats from Russia and China, and a major election in the U.S. — as well as a host of other uncertainties — the S&P 500 has failed to break up or down, trading for 39 straight days within a daily range of less 1%.

Some technicians opine that the official summer ends with the Labor Day weekend and that volume and volatility are bound to increase. Maybe, but the direction of a break, in my opinion, depends more on earnings and the timing of a rate hike than almost any of the other imponderables.

There is a huge cache of cash on the sidelines, but investors appear reluctant to commit due to an indecisive Fed and lack of strong earnings from key sectors. Thus, low volume and a narrow trading range may continue until after the November elections.

However, Friday’s recovery was a huge technical event, signaling that the trend is still bullish. The break, when it comes, will likely be in the direction of entry and that is to bullish-side.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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