S&P 500: Is the Top In Sight?

Stock prices hit new records again on Friday, but is there any gas left?

On Friday, stock prices slightly extended Thursday’s rally, with the S&P 500 closing just 0.03% higher following a less volatile trading session and an intraday retreat. The new record high for the S&P 500 is 5,111.06, and the Nasdaq set its new record at 18,091.62 before closing below the 18,000 mark.

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 late last week's rally, this still holds true. Nevertheless, such volatility complicates short-term market predictions.

This morning, the market is relatively quiet again, with the S&P 500 futures contract trading mostly unchanged. It will be awaiting some important economic data this week. Tomorrow, we will receive the CB Consumer Confidence; on Wednesday, the Preliminary GDP; and on Thursday, the important Core PCE Price Index, among others.

The investor sentiment has improved a bit last week; Wednesday’s AAII Investor Sentiment Survey showed that 44.3% of individual investors are bullish, while 26.2% 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 rallied on Thursday following the Nvidia quarterly earnings, but on Friday, it experienced more uncertainty and sideways trading action. The market has become overbought again; however, the index remains above a month-long upward trend line, as we can see on the daily chart.

S&P 500: Is the Top In Sight? - Image 1


S&P 500 Gained 1.66% Last Week

The weekly chart of the S&P 500 reveals an over month-long rally, starting from early January. The market has been accelerating its medium-term uptrend since a relatively flat correction in December. Last week on Monday, I noted that “there are indications that another correction or consolidation may be in the cards.” Indeed, the market retraced some of the rally; however, Thursday's rally last week led to a weekly advance of 1.66%.

S&P 500: Is the Top In Sight? - Image 2

Nasdaq 100 Struggles With 18,000

On Friday, the technology-focused Nasdaq 100 index reached a new all-time high at 18,091.62, 50 points above the previous high from February 12. However, the market failed to remain above 18,000, ultimately closing 0.37% lower.

After Wednesday's market close, Nvidia released its quarterly report, which was better-than-expected, and significant for the hot AI sector. This news triggered a substantial rally and marked a record increase in market capitalization for Nvidia, a company nearing the $2 trillion mark. On Friday, Nvidia's stock reached a new record of $823.94 before closing just 0.36% higher. However, this morning, it is expected to open over 1% higher.

S&P 500: Is the Top In Sight? - Image 3

VIX - Another Decline

The VIX index, also known as the fear gauge, is derived from option prices. On Friday, it fell below the 14 level. Nonetheless, it is still notably above its recent lows from November to February, indicating that the market fears a downward correction at some point.

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: Is the Top In Sight? - Image 4


Futures Contract Trading Along 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 5,120, and this morning, it’s trading along the 5,100 level. It appears to be trading within a consolidation. The support level is at 5,060, marked by the recent highs.

S&P 500: Is the Top In Sight? - Image 6


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 testing the 18,000 mark. In my previous Tuesday's 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 last week, it rallied to a new record high on Nvidia news.

The S&P is likely to open virtually flat today, extending a consolidation around the 5,100 level. It may experience an intraday downward correction at some point. The most likely scenario is an extended consolidation, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to fluctuate after reaching new record highs last week.
  • A longer consolidation phase may ensue, following an extended rally over the past months.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist