S&P 500 gained over 5% in February. Will March bring further gains?
In February, the S&P 500 index extended its multi-year bull run, breaking above the 5,000 level and gaining 5.17% compared to its January 31 closing price. 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.
However, there is growing uncertainty recently. Indexes are still very close to their new record highs, but stock prices basically go sideways. So, the question is – is this just a pause within an uptrend or some topping pattern before a more meaningful correction?
Yesterday, the S&P 500 went closer to its record high again, gaining 0.52% and nearing 5,100 level. 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 late last week's rally, this still holds true. Nevertheless, such volatility complicates short-term market predictions.
This morning, the S&P 500 futures contract is 0.1% lower, indicating another neutral opening for the index. The market is expected to continue its short-term consolidation following recent gains and a record-breaking rally.
The investor sentiment has improved again this week; 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 extends a consolidation following last week’s rally, remaining well above a month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 Is Above 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. In recent days, the market retraced some of its gains, but yesterday it rebounded above the 18,000 mark, gaining 0.95%. For now, it looks like a consolidation within an uptrend.
VIX – Still Below 14
The VIX index, also known as the fear gauge, is derived from option prices. Recently, it dropped below the 14 level. Despite weakness in stocks on Monday, it remained flat, and on Tuesday, it broke below the 13.50 level. Yesterday, it declined from above the 14 level once again. However, it still remains 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.
Futures Contract Trades 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. This week, it traded below the 5,100 level. Yesterday, the market retraced its declines and broke back above the 5,100 level. It still appears to be trading within a consolidation. The support level is now at 5,080, marked by the recent fluctuations.
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 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.
This week, the index retraced some of its rally from late last week. It remains to be seen whether this retracement marks the top, at least in the short term.
Today, the S&P 500 is likely to open slightly lower, extending a short-term consolidation, just below the record highs. The most likely scenario remains an extended consolidation, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.
What about the stock market in 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 closer to the record high again.
- 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