Mixed Expectations as S&P 500 Nears Record Again

Investor sentiment improved, but will stock prices reach new highs?

Tuesday’s trading session was expected to bring some downward pressure and possibly a breakdown below recent lows. However, stock prices gained, and the index closed 0.62% higher. It still appears to be a flat correction within an uptrend. This morning, the S&P 500 is about to open virtually flat, as indicated by futures contracts (-0.1%). The session will be shortened due to tomorrow’s holiday, likely leading to low volatility.

However, the day is packed with economic data that may lead to some changes. The ADP Non-Farm Employment Change release was lower than expected at +150,000, and the Unemployment Claims number was higher than expected at 238,000. Today, we will also get the ISM Services PMI at 10:00 a.m., and the FOMC Meeting Minutes at 2:00 p.m.

As I mentioned in my stock price forecast for July on Monday, “While more advances remain likely, the likelihood of a deeper downward correction also rises. Overall, there have been no confirmed negative signals so far, but the May gain of 4.8% and June gain of 3.5% suggest a more cautionary approach for July (…) The market will be waiting for the quarterly earnings season in the second half of the month. Plus, there will be a series of economic data, including the CPI release on July 11, the Advance GDP number on July 25, and the FOMC Rate Decision on July 31.”

Last week, the investor sentiment remained basically unchanged, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 44.5% of individual investors are bullish, while 28.3% of them are bearish (up from last week's reading of 22.5%). 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 remains relatively close to Friday’s record high of 5,523.64, as we can see on the daily chart.

Mixed Expectations as S&P 500 Nears Record Again - Image 1

Nasdaq 100 Closed Above 20,000

Yesterday, the technology-focused Nasdaq 100 index gained 1.01%, closing above the 20,000 level, just below Friday’s new record high of 20,017.71. It still appears to be a flat correction of the uptrend. This morning, the Nasdaq 100 is expected to open 0.1% lower.

Mixed Expectations as S&P 500 Nears Record Again - Image 2

VIX Closed Near 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. Since the previous Thursday, it has been closing above the 13 level, showing increasing fear in the market, but on Friday, it dipped to a local low of 11.87. Yesterday, the VIX closed slightly above 12, which means that there is still no fear in the market.

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.

Mixed Expectations as S&P 500 Nears Record Again - Image 3


Futures Contract: Still a Short-Term Consolidation

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading along the recent local highs and the resistance level of around 5,580. It still looks like a consolidation within an uptrend, although a topping pattern scenario cannot be ruled out.

Mixed Expectations as S&P 500 Nears Record Again - Image 5


The S&P 500 index is likely to open virtually flat despite some economic data releases. There is still an uncertainty about a possible correction amid the coming economic data and earnings releases. The risk of a downward correction is increasing; however, it still looks like a flat correction of the uptrend. Today, the market will see a lower volatility due to a shortened trading session and tomorrow’s holiday.

Quoting my Monday’s stock price forecast for July, “Investors continue pricing in the Fed’s monetary policy easing that is supposed to happen this year. Hence, a medium-term downward reversal still seems a less likely scenario. However, the recent record-breaking rally may be a cause for some short-term concern as a downward correction may be coming.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 retraced its recent declines yesterday, extending a consolidation along the last week’s new record high.
  • Investors are waiting for more economic data and the coming quarterly earnings season.
  • In my opinion, the short-term outlook is neutral.

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Paul Rejczak,
Stock Trading Strategist