Will stocks retrace some of their recent declines? Will the window dressing turn out to be bullish?
Stocks extended their Friday decline yesterday, with the S&P 500 index closing 1.07% lower. It retraced most of its rebound from the previous Friday’s local low of around 5,830. The key question remains: is this the start of a downtrend or just a correction of the recent advances? This morning, the S&P 500 is expected to open 0.3% higher, rebounding after two consecutive days of losses.
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, 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 continues its consolidation ahead of year-end, as we can see on the daily chart.
Nasdaq 100 Moves Closer to 21,000
The Nasdaq 100 index lost 1.28% on Monday, extending its Friday’s decline of 1.4%. Today, the technology-heavy index is expected to open 0.2% higher. Further fluctuations are likely following the recent rally.
VIX: Crawling Higher
On 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 over 18.45 on Friday, reaching a high of 19.22 yesterday.
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 Trades Below 6,000
This morning, the S&P 500 futures contract is moving sideways after a two-day sell-off. The support is now at 5,900-5,920, with resistance is at 6,000. The market may continue sideways as investors take profits following the recent rally.
Conclusion
The last trading session of the year is likely to open slightly higher for the S&P 500 index. Today’s session may see “window dressing” activity, but does this mean the market will rally? Unlikely. The market may move sideways following recent volatility.
Last 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 may retrace some of the recent declines, with year-end window dressing potentially influencing the market today.
- The stock market is still 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