Stock Prices Set to Gain on Lower Inflation

S&P 500 is about to reach a new record high, but will it continue advancing?

Despite some uncertainty following higher-than-expected Producer Price Index release yesterday, stock prices were gaining, with the S&P 500 index closing 0.48% higher. It went even closer to the February 28 record high of 5,264.85 as the daily high was at 5,250.37. The market has retraced almost all of its 311 points or 5.9% correction from the record high to a local low of 4,953.56 on April 19. Yesterday, the index was just 15 points below the all-time high.

Today, the market is likely to open higher after a slightly lower than expected Consumer Price Index release (+0.3% vs. +0.4% m/m), and lower than expected Retail Sales release (0.0% vs. +0.4% m/m). The futures contract rallied after the release, and right now, it’s trading 0.6% higher, pointing to a record-breaking open for the index.

On Monday, I noted ”The question arises: will the S&P 500 continue its bull market and reach a new record? It seems more and more likely; however, the index may see some short-term uncertainty as it approaches a series of the previous local highs and resistance levels.”

Last week, the investor sentiment has clearly improved, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that 40.8% of individual investors are bullish, while only 23.8% of them are bearish, down from 32.5% 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 remained at a potential resistance level marked by its trading range from March and April, as we can see on the daily chart.

Stock Prices Set to Gain on Lower Inflation - Image 1

Nasdaq 100 Extends Advances Above 18,000

Last week, the technology-focused Nasdaq 100 index has been mostly fluctuating along the 18,000 level. However, on Friday, it broke higher and retraced more of its previous declines. Potential resistance level remains at 18,400-18,500, marked by the March 21 record high of 18,464.70. Today, the tech stocks gauge is likely to open 0.6% higher following consumer inflation data.

Stock Prices Set to Gain on Lower Inflation - Image 2

VIX Rebounded to 14

The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 - the highest since late October, signaling fear in the market. Recently, it was going lower again, and on Friday, it was as low as 12.50, showing complacency in the market. Yesterday, VIX rebounded to 14 despite advancing 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.

Stock Prices Set to Gain on Lower Inflation - Image 3


Futures Contract Reaches 5,300

Let’s take a look at the hourly chart of the S&P 500 futures contract. The consumer inflation release led to a quick rally reaching new local highs.

The resistance level is at 5,300, and the support level remains at 5,200-5,220, marked by recent fluctuations.

Stock Prices Set to Gain on Lower Inflation - Image 5


The S&P 500 index is likely to open 0.6% higher after the important Consumer Price Index release. The market is set to reach a new record high at the open as yesterday’s trading session closed just around 0.4% below that level.

Last Tuesday, I wrote “(…) the market may pause or even retrace some gains. With most of the earnings season over (there is only one very important release left - NVDA on May 22) and the FOMC Rate Decision release behind us, expect a period of uncertainty.”

The uncertainty seemed to be gone, but the overall bullish sentiment coupled with low VIX readings may be worrying for the market in the short-term. Some profit-taking may be on the horizon.

In my Stock Price Forecast for May, I noted “Where will the market go in May? There's a popular saying: 'Sell in May and go away,' but statistics don't consistently support such clear seasonal patterns or cycles. The safe bet for May is likely sideways trading, with investors digesting recent data suggesting that inflation may not be transitory, and the Fed could maintain its relatively tight monetary policy. However, economic data isn't entirely negative, and strong earnings from companies may continue to fuel the bull market.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to reach a new record high after the CPI release this morning.
  • On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance. Recently, the S&P 500 retraced all of its mid-April sell-off.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist