Is the S&P 500 Nearing a Top?

S&P 500 remains close to its record high. Is it forming a top?

Stocks didn’t do much on Friday, with the S&P 500 index extending a short-term consolidation and closing just 0.04% lower. The broad stock market continued to fluctuate along a new record high from Wednesday (5,447.25), which was reached after a lower-than-expected CPI reading. This morning, futures contracts are pointing to a flat opening for the index.

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 much improved, as indicated by the AAII Investor Sentiment Survey last Wednesday, which showed that 44.6% of individual investors are bullish, while 25.7% of them are bearish (down from last week's reading of 32.0%). 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 the 5,400 level, as we can see on the daily chart.

Is the S&P 500 Nearing a Top? - Image 1


S&P 500 – Another Week of Gains

Compared to the previous Friday’s closing price, the index gained 1.58%, reaching a new record high and extending its long-term uptrend. On the previous week, the index gained 1.3%, so the bulls remained in charge.

Quoting an article from May 13: “The recent price action confirmed the importance of the 5,000 level as a medium-term support. It’s hard to say whether the market will continue its long-term uptrend; however, it will most likely remain above 5,000 in the coming weeks or months.”

Is the S&P 500 Nearing a Top? - Image 2

Nasdaq 100 - New Record High on Friday

On Friday, the technology-focused Nasdaq 100 index reached a new record high of 19,664.59, before closing 0.42% higher. It was led higher by a handful of stocks, including MSFT and the record-breaking NVDA. This morning, it is likely to open just 0.2% higher.

Is the S&P 500 Nearing a Top? - Image 3

VIX Remains Close to 12

The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Recently, the VIX came back towards 12. On Friday, it was as high as 13.45, before closing within a short-term range.

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.

Is the S&P 500 Nearing a Top? - Image 4


Futures Contract Is Still Close to 5,500


Let’s take a look at the hourly chart of the S&P 500 futures contract. It is extending a consolidation along the 5,500 level. This still looks like a relatively flat correction of the uptrend. The resistance level is at 5,520, and the support level is at 5,450.

Is the S&P 500 Nearing a Top? - Image 6


Quoting from my Friday’s analysis, “Where will the market go following the record-breaking rally? The most obvious answer would be a correction of the advance and a retracement of the move from around 5,350 to around 5,450. However, a potential retreat could spark a new wave of demand, thus extending consolidation along new record highs. More pronounced profit-taking action may be coming at some point. Nevertheless, the market is still trading within an uptrend.”

This morning, the market is likely to go sideways. Investors will be waiting for economic data releases this week: Retail Sales number tomorrow, the Unemployment Claims on Thursday, and on Friday – the important Flash Manufacturing PMI/ Flash Services PMI data. On Wednesday, there will be a holiday in the U.S., leading to calm trading this week. However, on Friday, the ‘quadruple witching day’ may cause volatility.

On previous Friday, I noted “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”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to extend a consolidation along its new record high; however, a profit-taking action at some point is getting possible.
  • Recently, stock prices rebounded and reached new record highs despite mixed data and growing uncertainty.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist