Stocks: Mixed Expectations Ahead of Fed, Earnings

Will stocks extend their advances on Fed release today?

Yesterday, the S&P 500 index traded sideways after reaching a new record high of 4,931.09, closing 0.06% lower. The market continued its uptrend following Monday’s breakout above 4,900 level. Recent advances have been driven by earnings releases and expectations of a more accommodative monetary policy from the Federal Reserve. Today is the Fed day, so the market may see an increased volatility following the Rate Decision at 2:00 p.m. But will it be a “buy rumor, sell facts” price action? There will definitely be an increased volatility later in the day.

Despite reaching a new record, there is a lot of uncertainty in the market right now. Speaking definitively about trend following has become more challenging, and those who remain bullish should consider at least partially closing positions.

Surprisingly, investor sentiment has slightly worsened once again last week – last Wednesday’s AAII Investor Sentiment Survey showed that 39.3% of individual investors are bullish, lower than the previous week. Meanwhile, the neutral reading increased to 34.6%. 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. Today, we will get a new reading, and it should be similar to the previous one, slightly bullish, but with an expectation for some profit-taking in the market.

On the previous Friday, stock prices broke above their month-long trading range, invalidating any potential medium-term topping pattern scenarios. Last Monday, I wrote that “in the short term, one would expect some downward correction as the market becomes increasingly overbought”. Despite new highs, it seems that a correction scenario is likely in the near term. The market rallied from its previous Wednesday’s daily low of around 4,715 – an advance of around 216 points. Of course, it's hard to tell if this marks the peak of a rally, but caution may be advised, as a correction or consolidation could occur at some point.

The S&P 500 futures contract is trading 0.5% lower this morning, indicating a lower opening of the S&P 500 index. In addition to the Federal Reserve announcement today, investors will be awaiting important earnings reports this week, including those from AAPL, AMZN, META tomorrow, along with the monthly jobs data on Friday. Yesterday’s releases from MSFT, GOOG, and AMD led to after-hours decline in the market. While Microsoft's stock is expected to open 0.5% lower, Alphabet is trading almost 6% lower in the pre-market.

The market continues to trade above an over week-long upward trend line, as we can see on the daily chart.

Stocks: Mixed Expectations Ahead of Fed, Earnings - Image 1

Nasdaq Remains Relatively Weak

Last Wednesday, the technology-focused Nasdaq 100 index reached a new all-time high at the level of 17,665.26. However, yesterday, it failed to extend the uptrend, closing the day down by 0.68%.

In early January, the Nasdaq 100 bounced sharply, followed by another advance and closing above the important daily gap down, which was a positive signal. Consequently, it broke to new record highs. However, a correction may occur at some point as the market is currently technically overbought in the short term.

Stocks: Mixed Expectations Ahead of Fed, Earnings - Image 2

VIX – Further Decline

The VIX index, also known as the fear gauge, is derived from option prices. While it continues to trade sideways, there have been attempts at a breakout above the 15 level. Yesterday's stock market rally pushed the VIX slightly lower again.

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.

Stocks: Mixed Expectations Ahead of Fed, Earnings - Image 3


Futures Contract Struggles Along the Trend Line

Let’s take a look at the hourly chart of the S&P 500 futures contract. This week, it reached new record highs, nearing the 4,960 level. Yesterday, it retraced some of those gains, declining towards the short-term upward trend line. As of now, no confirmed negative signals have emerged; nevertheless, the market is still in overbought territory. The support level remains around 4,920-4,930, marked by recent fluctuations.

Stocks: Mixed Expectations Ahead of Fed, Earnings - Image 5


The S&P 500 index is expected to open 0.5% lower today, with investors keeping a close eye on the important Fed monetary policy release at 2:00 p.m. Increased uncertainty follows the recent rally and new record highs, although investor sentiment remains elevated ahead of today’s data and tomorrow’s key quarterly corporate earnings releases. However, a more pronounced downward correction may occur at some point.

On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, the previous Friday’s price action left no illusions of a potential medium-term trend reversal. The market is overbought in the short term, but predicting a correction is currently very challenging.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 set yet another new record high yesterday, extending Monday’s advance by less than two points; today’s Fed release will likely lead to an increased intraday volatility.
  • While setting new records is very bullish, there is uncertainty about whether the market might retrace some of the rally. The index may be approaching the peak of a short-term uptrend.
  • In my opinion, the short-term outlook is neutral.

The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.

Thank you.

Paul Rejczak,
Stock Trading Strategist