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Wall Street: what's next for US equity indices as geopolitical tensions overshadow?

As Middle Eastern tensions stabilise, US equity markets show signs of resilience. With a light economic calendar but key Retail Sales data on the horizon, here's what investors should focus on this week.

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Geopolitical tensions ease

With diplomatic efforts and bad weather preventing a further escalation in Middle Eastern geopolitical tensions over the weekend, we are seeing a reversal of the safe-haven flows put in place ahead of the weekend. US equity futures and yields are higher. The US dollar, crude oil, and gold prices have all eased during cautious trading in the early hours of the new week.

There remains a great deal of uncertainty hovering over the markets, as there has been all year, with the tragic events in the Middle East adding to the complexity.

Potential upsides

However, there are some positives, including the ones listed below, that may help the market climb a "wall of worry," especially if events in the Middle East remain contained. We recommend staying open-minded and flexible.

  • Monetary policy

The rise in long-end yields and the tightening of financial conditions have removed the need for further Federal Reserve rate hikes

  • Earnings season

The earnings season appears stable, showing signs of stabilisation

  • Seasonal and technical factors

Seasonal and technical factors are positive

  • Inflation trends

While inflation is trending lower, last week served as a reminder that it will be a bumpy descent

  • Market leaders

The "Magnificent Seven," which comprises 30% of the S&P 500 by market capitalisation, has been, and continues to be, a driving force for the S&P 500 this year

Upcoming economic indicators and retail sales

The US economic calendar is light this week. The main event to watch is the release of retail sales data for September on Tuesday night at 11:30 pm, which will be closely monitored to assess the health of the US consumer.

Retail Sales are expected to increase by 0.3% in September, easing from 0.6% in August. Retail Sales, ex volatile Autos and Gas are expected to increase by 0.1% in September from 0.2% in August.

S&P 500 technical analysis

During September, we forecasted that the S&P 500 would experience another downturn towards the 4250/4200 support region as the third and final wave (Wave C of an ABC correction) to complete a correction from the July 4607 peak.

Following the indicators of consolidation that emerged within the 4250/4200 support zone in early October and subsequent to last Monday's close above the August 4335 high, we believe the correction is finalised and have shifted to a bullish stance, seeking a retest and breach of the July peaks.

Be aware that if the S&P 500 were to experience a sustained breach below the 200-day moving average at 4220/4200, it would serve as a warning that a more substantial pullback is in progress.

S&P 500 daily chart

Source: TradingView

Nasdaq technical analysis

Much like the S&P 500, during September we noted that the Nasdaq was lacking another downturn as part of the correction that commenced in July. The original articles can be found here and here.

While the pullback in the S&P 500 met our retracement target, the pullback in the Nasdaq fell short of our preferred wave equality objective in the 14,200 area. As we pointed out last week, this leaves the question open as to whether the Nasdaq has finalised its correction from the July peak or still requires a final downturn towards 14,200 before the uptrend resumes.

What we do know is that if the Nasdaq can achieve a sustained breach above the downtrend resistance at 15,350, stemming from the July 15,932 peak, it would confirm that the correction is complete and the uptrend has recommenced—anticipating a push towards 16,500 by year-end.

Nasdaq daily chart

Source: TradingView

  • TradingView. the figures stated are as of October 16, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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