Stock Prices Rallied Back, More Consolidation Ahead?

The S&P 500 nears its record high again, but will the uptrend continue?

On Tuesday, bullishness returned to the stock market as the S&P 500 index retraced its recent declines and went near the record high again. The market reacted to the Consumer Price Index release, which met expectations, thereby alleviating uncertainty in the market.

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, yesterday, the S&P 500 closed at its highest level in history, gaining 1.12%. The intraday record high level is still Friday’s daily high of 5,189.26.

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.

Last Wednesday, the investor sentiment has improved again; the AAII Investor Sentiment Survey showed that an astounding 51.7% of individual investors are bullish, while only 21.8% 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, however, yesterday, it was near that line as we can see on the daily chart.

Stock Prices Rallied Back, More Consolidation Ahead? - Image 1

Nasdaq 100 is Back Above 18,000

The technology-focused Nasdaq 100 index reached a new record high of 18,416.73 on Friday, before closing 1.5% lower. On Monday, it lost 0.4%, and yesterday, it gained 1.5%, retracing most of the declines. It still looks like a consolidation following a multi-month rally.

Stock Prices Rallied Back, More Consolidation Ahead? - Image 2

VIX Drops Below 14 Again

The VIX index, also known as the fear gauge, is derived from option prices. In the middle of last week, it remained elevated despite new records for the indexes, and on Monday, it reached as high as 16 as stock prices kept retracing their recent advances. Yesterday, the VIX dropped below 14 as stocks retraced their declines.

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.

Stock Prices Rallied Back, More Consolidation Ahead? - Image 3


Futures Contract Is Close to Record High

Let’s take a look at the hourly chart of the S&P 500 futures contract. It’s a new series of the contract, hence around 60 points relative advance last Friday (the futures contract prices in the inflation, measured by non-risk assets yield). This morning, the market is trading closer to the record high, following yesterday’s gain. A potential resistance level lies around 5,260, marked by last week’s peak.

Stock Prices Rallied Back, More Consolidation Ahead? - Image 5


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 mark.

Today, S&P 500 futures contract is virtually flat, indicating a neutral opening for the index. What could drive stock prices today? Investors are eyeing the 30-year Bond Auction at 1:01 p.m. 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.

A week ago, 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 near its Friday’s record high again, but it could see some more uncertainty and sideways trading action.
  • 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