S&P 500 Index Weekly Forecast: Eyes on the tech sector and Covid variant

• US stocks turn back from all-time highs as investor's concerns of the vaccine efficiency kick-in.
• The week ahead will focus on the covid variant reality and a bevvy of major US earnings in tech.

US stocks have wobbled as fears of a closed economy and delayed immunizations for the coronavirus plague risk sentiment. 

Weak economic data and underwhelming earnings have not helped in the final stretch of January driving investors to reverse some recent risky bets. 

However, the three main US indexes actually closed higher for the week, with the Nasdaq up over 4% due to the expectations for a near $2 trillion stimulus package for the American economy. 

Concerningly, US President Joe Biden said the US economic crisis was deepening and that the government needs to take major action now to help struggling Americans. 

US passes 25m coronavirus cases milestone

Biden continues to paint a bleak picture of the nation’s coronavirus outbreak in his first few days in office and has repeatedly warned that the situation is likely to worsen before it improves.

Meanwhile, the warnings come as the US on Sunday surpassed 25 million coronavirus cases, according to data from Johns Hopkins University.

The most recent data from Johns Hopkins’s indicates that 25,031,463 cases have been confirmed so far. The same data shows the US has reported 417,902 deaths due to the pandemic, the most of any country in the world.

The time it will take to turn around the pandemic’s trajectory could be a weight on the markets for the week's ahead, especially if the fatalities dramatically rise.

“A lot of America is hurting. The virus is surging. We’re 400,000 dead expected to reach well over 600,000,” Biden said on Friday.

Indeed, the US has surpassed 400,000 total Covid-19 deaths last week with a quarter of those coming over the previous 36 days, according to data compiled by Johns Hopkins University. 

Biden warned that “there’s nothing we can do to change the trajectory of the pandemic in the next several months.” 

All eyes are on the vaccine roll-out, and as noted in last week's article, the vaccination campaigns have progressed more slowly than expected around the world, allowing time for variations of variants.

According to data from the Centers for Disease Control (CDC), more than 20 million doses of the coronavirus vaccines have been administered thus far and around 3 million people have received their second dose of the vaccines.

More vaccine progress data will be published at the end of January and there’s a lot of good news around vaccines and stimulus priced into equities. However, this is where the most blatant risk lies as the variant evolves.

The mutations we are seeing can block the effectiveness of antibodies used to treat COVID-19 according to new data and the White House health advisor Dr. Anthony Fauci.

However, even if the drugs are less effective, they will still likely provide enough protection to make the vaccines worth getting, Fauci said during a White House press briefing.

“We’re following very carefully the one in South Africa, which is a little bit more concerning, but nonetheless not something that we don’t think we can handle,” Fauci said.

“Bottom line: We’re paying very close attention to it.''

''There are alternative plans if we ever have to modify the vaccine. That’s not something that is a very onerous thing, we can do that given the platforms we have,” Fauci said, but that is not a helpful statement for markets which have been banking on a successful vaccine outcome.

Across the pond, the findings are alarming and dwarf Fauci's optimism. 

In December, the UK reported a Covid-19 variant of concern, commonly referred to as the B117 variant which scientists have established that is somewhere between 50% to 70% more transmissible than other variants.

Researchers on the UK government’s New and Emerging Respiratory Virus Threats Advisory Group found it may increase the death rate by 30% to 40%, though their sample size was small and they said more research is needed.

The B117 has now been detected in more than 50 countries although other variants of concern have also been identified, including in California, South Africa and Brazil.

So far, the United States has not detected any cases of Covid-19 with the strain identified in South Africa, Fauci said, though he added that the level of surveillance for the strains “is not at the level that we would have liked.”

However, the US has identified at least 144 cases with the UK variant so far, according to recent data from the CDC.

In the US, another variant of concern is called L452R and is increasingly being identified by genomic sequencing in multiple counties across the state.

The department said in a statement: “It’s too soon to know if this variant will spread more rapidly than others”.

“The fact that this variant was identified in several large outbreaks in our county is a red flag and must be investigated further,” said Santa Clara County health officer, Dr Sara Cody.

Authors of the CDC study have warned that the rapid spread of Covid variants worldwide will require “continuous monitoring of the significance of changes for maintained protection by currently authorized vaccines,” and markets will depend on it.

The week ahead

Meanwhile, technology-related stocks had started to take a backseat towards the end of last year to so-called value or cyclical plays, whose businesses are expected to gain the most from the economic revival promised by vaccines against COVID-19.

Therefore, the week ahead will be interesting given the variant reality and as we see a bevvy of major US earnings in tech, led by Apple, Microsoft and Facebook which could help the sector reassert their dominance after leading markets higher for most of 2020.

On the economic calendar, the US growth data in Gross Domestic product and the Federal Reserve's interest rate decision will be the focus.

The timing of tapering has been a theme in the markets, but changes to the statement are likely to be minor, consistent with no plans for policy changes soon.

A dovish tone on the policy will cement the lower for longer trajectory, but there will need to be optimism on growth outlooks if stocks are to benefit on the event.

Real GDP appears to have slowed, potentially to the point of contraction as Q4 ended which makes this week's data critical. 

S&P 500 technical analysis

Weekly chart

From a longer-term perspective, the W-formation would be expected to see a retracement back to at least a 38.2% Fibonacci level.

However, the neckline of the formation meets with 50% and the 61.8% Fib retracements.

Daily chart

Meanwhile, a daily perspective offers a bullish outlook from the support that meets the 38.2% Fibo of the latest bullish impulse. 

From an FX perspective, if the risk-off theme does prevail, high beat pairs such as AUD/JPY will be compelling:

 

The Chart of the Week: Bears step up to challenge the bulls at key resistance