Stocks extend their short-term consolidation. Is it just another pause within an uptrend?
Stock prices remained relatively unchanged again, with the S&P 500 index losing 0.29% yesterday. On Wednesday, the market dropped by 0.2% following a gain of over 1% on Tuesday. Thus, the market keeps extending a consolidation below its last Friday’s new record high of 5,189.26.
The question remains: will stocks break higher and reach new all-time highs? This morning, the S&P 500 futures contract is trading 0.1% higher, indicating a slightly higher opening for the index today. Today, there will be a quadruple witching Friday, which involves settlements for a series of contracts and options, among others. It is usually accompanied by increased volatility.
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 yet, it was the same story again last week. However, on Friday, a much more pronounced profit-taking occurred. Nevertheless, this week, the S&P 500 went closer to its record high again.
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.
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 last week’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.
The investor sentiment remains elevated; Wednesday’s AAII Investor Sentiment Survey showed that 45.9% of individual investors are bullish, while only 21.9% 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 is still trading above an over month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 Trading Along the 18,000 Level
Last Friday, the technology-focused Nasdaq 100 index reached a new record high of 18,416.73, however, it quickly retraced the advance, and since then, it has been trading sideways. It still looks like a consolidation following a multi-month rally.
VIX Bounced Back Above 14
The VIX index, also known as the fear gauge, is derived from option prices. Yesterday, it bounced back above the 14 level, despite a relatively minor negative change for the index.
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 Fluctuating Above 5,200
Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it bounced from the record high of around 5,260 following worse-than-expected producer inflation data, and this morning, it’s trading sideways. The support level remains at 5,200-5,220.
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 5,100, and the Nasdaq 100 index reaching above the 18,000.
Today, the S&P 500 index is likely to open slightly higher after a worse-than-expected Empire State Manufacturing Index release. Last Tuesday, I wrote that “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.” Despite late last week’s record-breaking advance, it remains a probable scenario.
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 continues to trade near its new record high from last week; profit-taking could occur at some point.
- It still appears to be consolidating within an uptrend.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist