Are Stocks Approaching a Top?

Stock prices extended their rally, but will the records hold?

Stock prices broke higher on Wednesday, with the S&P 500 index reaching a new record high of 5,354.16 and closing 1.18% higher. Today, futures contracts are pointing to a 0.1% lower open for the index following the monetary policy easing from the ECB that was announced at 8:15 a.m.

In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.

However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”

Investor sentiment remained unchanged, as indicated by the AAII Investor Sentiment Survey yesterday, which showed that 39.0% of individual investors are bullish, while 32.0% of them are bearish (up from last week's reading of 26.7%). 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 broke above its high from May 23, as we can see on the daily chart.

Are Stocks Approaching a Top? - Image 1

Nasdaq 100 Reaches New Record Above 19,000

The technology-focused Nasdaq 100 index reached a new record high of 19,035.87 yesterday, driven by another record-breaking advance in NVDA stock, among others.

Today, the Nasdaq 100 is likely to open unchanged. It may see some more uncertainty, and perhaps, a profit-taking action at some point.

Are Stocks Approaching a Top? - Image 2

VIX – Below 13

The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 - the highest since late October, signaling fear in the market. Recently, it was declining again, and on May 23, it reached its lowest point since November 2019 at 11.52. Yesterday, it was below the 13 level, indicating less fear amid rising 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 Stocks Approaching a Top? - Image 3

Futures Contract Trading Along Previous High

Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it approached its high from May 23, setting a new record of around 5,370. For now, it looks like a flat correction of the uptrend. However, a profit-taking action cannot be ruled out at some point. The support level is now at around 5,340-5,350, marked by the recent resistance.

Are Stocks Approaching a Top? - Image 5


The S&P 500 index is likely to open virtually flat, remaining close to its new record high. So, the question arises: Will the market retrace some of its recent rally? The bearish argument is relatively thin trading, with only a handful of stocks like NVDA, MSFT, or AAPL responsible for the rally. On the other hand, the trend is still upwards, hence further advances are more likely.

On Tuesday, I noted “The market may see more short-term uncertainty, but a deeper correction now seems less likely.” This still seems very true, especially after yesterday’s record-breaking advance.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 reached a new record high, but the likelihood of a correction is rising.
  • On Friday, stock prices were the lowest since early May before rebounding and retracing the whole of the decline.
  • In my opinion, the short-term outlook is neutral.

The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.

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Thank you.

Paul Rejczak,
Stock Trading Strategist