Are Stock Prices Forming a Medium-Term High?

S&P 500 got back above the 5,100 level, but will the uptrend continue?

Wednesday’s session didn’t change much on the stock market, despite the long-awaited testimony from the Fed Chair Powell, with the S&P 500 index gaining 0.51% following its Tuesday’s decline of 1%.

On Tuesday, the market reversed from its Monday's new record high of 5,149.67, falling back below the 5,100 level. What caused the decline? Most likely, it was simply profit-taking action.

On Friday, I mentioned about February, “Despite concerns about stock valuations, the market rallied to new record highs, fueled by hopes of the Fed's monetary policy pivot and the AI revolution.”. And yet, it was the same story again on the first trading day of March. However, on Monday, some profit-taking emerged, and on Tuesday, a full-scale downward correction occurred.

While indexes were hitting new record highs, most stocks were essentially moving sideways. So, the question is – is this just a pause within an uptrend or some topping pattern before a more meaningful correction? Still, there have been no confirmed negative signals; however, one might consider the possibility of a trend reversal.

Recently, the stock market continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote on February 7, “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.” Despite Friday's rally and Monday’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.

This morning, the S&P 500 futures contract is gaining 0.5%, so the S&P 500 index is likely to open higher and retrace more of its Tuesday’s rout. However, there will be a volatility following another part of the Jerome Powell's Testimony, scheduled just half an hour after the opening of the session.

Yesterday, the investor sentiment has much improved again; the AAII Investor Sentiment Survey showed that an astounding 51.7% of individual investors are bullish, while only 21.8% of them are bearish. The AAII sentiment is a contrary indicator in the sense that highly bullish readings may suggest excessive complacency and a lack of fear in the market. Conversely, bearish readings are favorable for market upturns.

The S&P 500 index continues to trade above its over month-long upward trend line, as we can see on the daily chart.

Are Stock Prices Forming a Medium-Term High? - Image 1

Nasdaq 100 Is Above 18,000 Again

On Friday, the technology-focused Nasdaq 100 index reached a new record high of 18,333.26. However, on Monday, it lost 0.4%, and on Tuesday, it sold off by 1.80%. Yesterday, it retraced the declines by 0.67%. For now, it looks like a consolidation following a multi-month rally.

Are Stock Prices Forming a Medium-Term High? - Image 2

VIX Remains Above 14

The VIX index, also known as the fear gauge, is derived from option prices. Stock prices rallied on Friday, leading the VIX lower as it approached the 13 level. It went closer to its previous lows, indicating a growing complacency in the market. However, on Tuesday, the VIX moved sharply higher, briefly breaking above the 15 level. Yesterday, it remained elevated despite rebounding stock prices.

Historically, a dropping VIX indicates less fear in the market, and rising VIX accompanies stock market downturns. However, the lower the VIX, the higher the probability of the market’s downward reversal.

Are Stock Prices Forming a Medium-Term High? - Image 3


Futures Contract Is Rebounding from an Overnight Low

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Tuesday, it broke below the 5,100 level, reaching a daily low at around 5,063. This morning, the market is back above 5,100. For now, it looks like a short-term consolidation following recent advances.

Are Stock Prices Forming a Medium-Term High? - Image 5


The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index breaking above 5,100, and the Nasdaq 100 index reaching above the 18,000 mark.

In my February 13 analysis, I noted that, “in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.”. Indeed, the correction occurred pretty fast, with the inflation number contributing to the downturn. However, the market quickly retraced the decline in the following days, and then rallied, led by Nvidia stock after its earnings release. This week brought more uncertainty, resulting in Tuesday's declines, but today, bullish sentiment appears to be prevailing once again.

Today, the S&P 500 is likely to open higher, retracing more of its recent decline. On Tuesday, I wrote that “The most likely scenario is an extended consolidation at some point, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.” This prediction turned out to be accurate, as the index quickly retraced recent gains. However, there may be further uncertainty and volatility ahead.

On Friday, I noted in my Stock Price Forecast for March, “So far, stock prices have been trending upwards in the medium to long term, reaching new record highs. The prudent advice one could give right now is to remain bullish or stay on the sidelines if one believes stocks are becoming overvalued and may need a correction. It's likely that the S&P 500 will continue its bull run this month. However, we may encounter a correction or increased volatility at some point as investors start to take profits off the table.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to retrace more of its recent declines this morning.
  • Currently, it appears to be consolidating within an uptrend.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist