S&P 500: Another High, More Uncertainty

Stocks reached new records, but a short-term correction may follow.

The S&P 500 index reached yet another new record high of 5,048.39 yesterday; however, it closed 0.09% below its Friday’s close. The market continued to rally, fueled by advances in a handful of tech sector stocks, with Nvidia leading the way.

Recently, my short-term outlook was neutral because the market seemed overbought and ready for a downward correction. When in doubt, it’s better to stay out of a position than to try to catch a top and open a short position too early.

Although a downward correction is widely expected, the overall market sentiment remains bullish, and the index may reach more records. This morning, futures contracts indicate that stocks are likely to open 0.3% lower, retracing some of their Friday’s advance.

Investor sentiment remains very elevated; last Wednesday’s AAII Investor Sentiment Survey showed that 49.0% of individual investors are bullish, while only 22.6% 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.

Last Wednesday, I mentioned that “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.”

The S&P 500 is likely to retrace a part of its recent advances. The market may get back to a month-long upward trend line, which right now, is at around 4,950, as we can see on the daily chart.

S&P 500: Another High, More Uncertainty - Image 1


Nasdaq 100 Accelerated Towards 18,000

Yesterday, the technology-focused Nasdaq 100 index reached a new all-time high at 18,041.45. Recently, it has been relatively weaker than the broader stock market, but last week, it caught up with the S&P 500. However, Nasdaq’s rally was led by a handful of “FANG” stocks like META, NVDA and MSFT. Last Wednesday, I wrote about the NYSE FANG+ index.

S&P 500: Another High, More Uncertainty - Image 2


VIX Bounced from 13

The VIX index, also known as the fear gauge, is derived from option prices. Last week, it fell below the 13 level, indicating a lack of fear in the market as stock prices reached record highs. Yesterday, it bounced to 14, extending a sideways move.

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: Another High, More Uncertainty - Image 3

 

Futures Retreats from Record High

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading along the 5,020 level, retracing some of the recent advance. The support level remains at 5,000-5,020, marked by the recent consolidation.

S&P 500: Another High, More Uncertainty - Image 5


Conclusion

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 5,000, and the Nasdaq 100 index getting close to 18,000. However, 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.

Today we will get a very important Consumer Price Index. It is likely to cause an increased volatility. The expectations are bullish for stocks, considering last week’s downwards revision of the previous CPI release. However, a 'buy rumor, sell facts' reaction may occur thereafter.

On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, the recent weeks’ price action left no illusions of a potential medium-term trend reversal. On January 30, I noted that “The market is overbought in the short term, but predicting a correction is currently very challenging.”. This still holds true; last week, the market rallied even further.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to retrace a part of its last week’s rally at some point.
  • The market appears overbought in the short term, but no negative signals are evident.
  • In my opinion, the short-term outlook is neutral.


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Thank you.

Paul Rejczak,
Stock Trading Strategist