Will stock prices continue their last week’s rally following a short-term correction?
Stocks backed off some more from their last week’s record-breaking rally yesterday, with the S&P 500 index dropping by 0.31%. On Thursday, it reached a record high of 5,261.10, and yesterday, it traded as low as 5,216.09. Last week, stock prices were influenced by the FOMC Rate Decision on Wednesday; this week, investors are bracing for a series of economic data releases, including today’s CB Consumer Confidence (10:00 a.m.), Thursday’s GDP and Friday’s Core PCE Price Index.
This morning, the S&P 500 futures contract is gaining 0.4%, indicating a rebound at the opening of the index. The question remains: will the Thursday’s surge lead to a downward correction and a potential retracement of the advance? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.
On March 1, I mentioned about 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 last week, it was all about that Fed pivot, hence a positive market reaction. The S&P 500 index seems to be crawling a wall of worry here.
While indexes were hitting new record highs, most stocks were essentially moving sideways. So, the question is – is this a 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.
Quite surprisingly, the investor sentiment worsened a bit; last Wednesday’s AAII Investor Sentiment Survey showed that 43.2% of individual investors are bullish, while 27.2% of them are bearish, up from 21.9% last week. 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 an over month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 – More Uncertainty
On Thursday, the technology-focused Nasdaq 100 index reached a new record high of 18,464.70, extending its long-term uptrend yet again. However, it retraced most of the intraday advance, and it went back below a local high from March 8. The market retreated back within the recent consolidation, indicating a failed breakout attempt. Potential short-term support level is at 18,200.
VIX – Failed Bounce, Still Close to 13
The VIX index, also known as the fear gauge, is derived from option prices. On Thursday, the index dipped slightly below the 12.50 level, before bouncing closer to 13 later in the day. It was the lowest since mid-January, indicating a lack of fear in the market. Yesterday, it retraced its intraday advance, despite another small decline in 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.
Futures Contract Is Near 5,300 Again
Let’s take a look at the hourly chart of the S&P 500 futures contract. On Wednesday, it broke above the recent trading range as markets reacted to the FOMC release. Yesterday, the market retraced some of the advance; this morning, it’s trading closer to the 5,300 level again. The resistance level is at 5,320, marked by the record high, and the support level is at 5,260, marked by the previous highs.
Conclusion
Today, the S&P 500 index is likely to open 0.4% higher, extending a consolidation following last week’s post-Fed record-breaking rally. More pronounced profit-taking action may be in cards at some point. However, as of now, there have been no confirmed negative signals.
The markets will be waiting for today’s important CB Consumer Confidence release at 10:00 a.m., which might increase volatility but likely won't break the recent trading range ahead of the long holiday weekend.
In my Stock Price Forecast for March, I noted “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 extend a short-term consolidation following post-Fed rally.
- Stock prices are getting more overbought, and another short-term correction may be coming.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist