Is there further downside for stocks, or will they hold above recent lows?
Stocks declined on Friday, with the S&P 500 breaking below the 6,000 level and closing 1.11% lower. The key question remains: is this the start of a downward reversal or just a correction of the recent advances? This morning, the S&P 500 is expected to open 0.9% lower, signaling further market weakness.
On December 9, I noted that “the S&P 500 index reached a new record high of 6,099.97 on Friday. The key question remains whether the uptrend will continue, despite signs of short-term overbought conditions.” The sharp decline following the Fed’s release confirmed that the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment has worsened despite a rebound, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 37.8% of individual investors are bullish, while 34.1% of them are bearish - an increase from 31.4% the previous week.
The S&P 500 index fluctuated along the 6,000 level, as we can see on the daily chart.
S&P 500: Uncertainty After Pulling Back
The S&P 500 gained 0.67% last week, retracing some of its prior week’s decline of 2%. Since the post-election rally in early November, the market has been consolidating.
The key medium-term support level remains around 5,700, marked by previous lows.
Nasdaq 100 Also Lower
The Nasdaq 100 index lost 1.36% on Friday, retracing some of its recent advance and part of its rebound from last Wednesday’s sell-off. Today, the technology-heavy index is expected to open 1.0% lower. It may see more fluctuations following the recent rally.
VIX: Rebound and Pullback
On Wednesday, December 18, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. It confirmed heightened fear in the market as stocks sold off. Last week, the VIX dropped below 15 but rebounded to 18.45 on Friday before closing just under 16.
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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
S&P 500 Futures Contract Selling Off Again
This morning, the S&P 500 futures contract is trading lower, reflecting worsening sentiment as year-end approaches. The nearest support is now at 5,880-5,900, marked by recent local lows. The market may continue to move sideways as investors take profits following the recent rally.
Conclusion
Monday’s trading session is set to open lower following overnight weakness in futures contracts.
On Friday, I noted “The key question remains: Will the S&P 500 continue higher and reach new records, or is this rebound part of a broader consolidation? Uncertainty and some profit-taking may dominate the final trading days of the year.”
In my Stock Price Forecast for December 2024, I wrote “the stock market experienced a strong rally in November, driven by the presidential election outcome. While December is historically a bullish month, increased volatility and a short-term correction remain likely.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is poised to retrace more of its recent advances today.
- The market is seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist