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At the beginning of the week, the S&P 500 index had no clear direction, moving most of the trading session near the opening price, but when it entered the close, it finally achieved a small gain of 0.18%, closing at 4613, setting a new record. Meanwhile, the Russell 2000 index exploded higher on an accelerated boost to cyclical stocks, jumping 2.65 percent to close at 2,358, just a line away from the all-time high of 2,360 in March.
While there is still much uncertainty ahead due to rising inflationary pressures and continued disruptions in supply chains, the strong performance of small and mid-cap stocks could indicate that investors are increasingly confident in the recovery as corporate earnings remain strong, anxiety about Covid-19 subsides, and Democrats rule out corporate tax increases in their settlement bill. In this case, it must be noted that the current general expectation for an annualized growth rate of the U.S. economy in the fourth quarter is 5 percent, although there are some aggressive projections of growth of up to 8.2 percent.
In the short term, the market's attention will be focused on the earnings season to gauge the strength of U.S. businesses in the face of several economic adversities, and there are two other key events this week that could make more sense for the stock market, namely the Fed's monetary policy decision and the October non-farm payrolls data.
Focusing on the U.S. economy, the FOMC is expected to formally announce plans to begin scaling back bond asset purchases on Thursday, taking into account that the conditions for withdrawing stimulus measures have been largely met. The market is fully priced for this action, so it is unlikely to trigger much volatility on its own; however, traders should pay attention to the overall tone of the Fed, as the agency may take a more hawkish stance to convince the market that it is not lagging behind other central banks. The Fed's hawkish stance could trigger a sell-off in risk assets, but any pullback should be transitional, as even if the Fed didn't signal a rate hike, traders have ignored expectations of two rate hikes next year.
In terms of employment data, the October non-farm payrolls report, which will be released on Friday, is crucial for investors, as it will provide a deep insight into the health of the labour market after last month's disappointing data. Analysts expect to see 450,000 new jobs, but we may need a figure of more than 500,000 to boost confidence to protect the bullish sentiment that has prevailed in recent weeks.
Russell 2000 Index Daily Chart Technical Analysis
The Russell 2000 index has staged a strong rally since its September lows, rising more than 9 percent amid increased risk appetite. At the beginning of the week, the multi-party momentum appeared to accelerate after the small-cap index cleared key resistance in the 2320-point zone. After this bullish breakout, the Russell 2000 index may retest its all-time highs in the 2,360 zone. Traders should carefully observe the price's reaction near this technical obstacle, and standing above this level may pave the way for a rebound to the 2410 area of channel resistance.
On the other hand, if the bears regain control of the market and the price moves lower, the first support level to consider appears at 2320. If sellers manage to break the index below this support, we may see a retracement towards the 200-day moving average and channel support near 2250.