S&P 500 Above 5,100, but More Profit-Taking May Be Coming

Uncertainty grows; are stock prices forming a short-term top here?

Stocks didn’t change much on Monday, and the market was much calmer than on Friday, when the S&P 500 index broke above the 5,100 level. Yesterday, it lost 0.12% after reaching a new record high of 5,149.67. On Friday, I mentioned 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.

While indexes are hitting new record highs, most stocks are 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 yesterday’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.

This morning, the S&P 500 futures contract is trading 0.3% lower, indicating a lower opening for the index and a continuation of the short-term retreat. The market is expected to retrace some more of Friday's rally; however, it appears it will continue to trade above the 5,100 level.

The investor sentiment has improved again; last Wednesday’s AAII Investor Sentiment Survey showed that 46.5% of individual investors are bullish, while only 21.3% 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 broke above the recent trading range, and the short-term resistance level of 5,100, as we can see on the daily chart.

S&P 500 Above 5,100, but More Profit-Taking May Be Coming - Image 1

Nasdaq 100 – No New Record High Yesterday

On Friday, the technology-focused Nasdaq 100 index reached a new record high of 18,333.26, and yesterday, it lost 0.42%, retracing some of the Friday’s rally. The Nvidia stock rallied by almost 4%, but pulled back from its new record of $876.95. However, this wasn't enough to push the Nasdaq higher.

S&P 500 Above 5,100, but More Profit-Taking May Be Coming - Image 2

VIX Bouncing From 13

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. Yesterday, the VIX bounced from its Friday’s local low, remaining below the 14 level.

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.

S&P 500 Above 5,100, but More Profit-Taking May Be Coming - Image 3


Futures Contract Is Still Above 5,100

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it reached a new record high of around 5,149, and yesterday, it’s dipped to the support level of 5,100-5,120. This morning, it’s trading along the 5,120 level. For now, it looks like a short-term consolidation following last week’s advance.

S&P 500 Above 5,100, but More Profit-Taking May Be Coming - 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.

Today, the S&P 500 is likely to open lower again, retracing more of its recent advance. 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.

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 fluctuate following last week’s gains; the important support level is at 5,100.
  • A more extended consolidation may follow the recent months' rally
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist