Quarterly earnings and economic data causing volatility. Is correction finally over?
Stocks opened lower yesterday but recovered most losses, with the S&P 500 closing just 0.46% lower. Positive earnings releases from MSFT and GOOG boosted sentiment in the after-hours, and this morning, the index is likely to open 0.8% higher. Additionally, today’s Core PCE Price Index release was as expected, which pushed the market slightly higher.
Last Friday, the index hit a new medium-term low of 4,953.56. This marked its lowest level since late February, with a decline of over 311 points or 5.9% from the record high of 5,264.85 on February 28. Earlier this week, stock prices rebounded as tensions in the Middle East somewhat eased, and investors shifted their focus to the quarterly earnings releases.
In my Stock Price Forecast for April, I noted, “Closing the month of March with a gain of 3.1%, the question arises: Will the S&P 500 further extend the bull market in April, or is a downward correction on the horizon? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.”
The sentiment worsened again, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that only 32.1% of individual investors are bullish, while 33.9% 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.
Last Friday, the market broke a significant support level, marked by the daily gap up from February 22 (4,983.21-5,038.83), but this week, it retraced some of the decline, closing above that support level on Tuesday, Wednesday, and yesterday as we can see on the daily chart.
Nasdaq 100 – Uncertainty Following a Rebound
Recently, the technology-focused Nasdaq 100 index broke the 18,000 level, and last Friday, it briefly dipped below the 17,000 level, reaching a local low of 16,973.94.
On Wednesday, it traded as high as 17,653.66, and yesterday, it was recovering losses from the open, closing 0.55% lower. The resistance level remains at 17,800, marked by the previous lows. Yesterday’s MSFT and GOOG earnings release and today’s data are expected to push the index 1.1% higher at opening.
VIX – Closer to 15
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, recent market volatility has led to an increase in the VIX. Last Friday, it reached a high of 21.4, the highest since late October, indicating fear in the market. This week, it has been retracing that advance, reaching closer to the 15 level 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.
Futures Contract Is Above 5,100 Again
Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, the market sold off to a local low of around 5,022 in a reaction to Wednesday’s earnings release from META. However, it rebounded during regular hours, and after the close, accelerated the advance, breaking slightly above the recent high – again, on earnings releases. Potential resistance level is at 5,160, with support at 5,100.
Conclusion
The S&P 500 index accelerated its downtrend last week, extending a correction from the March 28 record high of 5,264.85 on Middle East tensions, strong U.S. dollar. Last Friday, it sold off below the important 5,000 level, and this week, it rebounded and retraced some of the declines. Yesterday, it rebounded from a lower opening, and this morning, it is poised to open higher following earnings releases and economic data.
On Wednesday, I wrote “Was it an upward reversal? It still looks like an upward correction or consolidation following an almost 6% decline from the recently acquired new record high.
However, it might be a time for cautious optimism, as earnings releases appear to be driving stock prices higher.”
Indeed, the earnings provide a reason to be cautiously optimistic. However, it's uncertain if this week's gains signal a true upward reversal or are just a correction of the recent declines.
On April 2, I wrote that “In April, we will see a usual series of important economic data, but with the Fed leaning towards easing monetary policy, we should perhaps pay more attention to the quarterly earnings season. However, good earnings may be met with a profit-taking action this time. The market appears to be getting closer to a correction.”
Then, I added: “It appears that profit-taking is happening. Is this a new downtrend? Likely not, however, a correction towards 5,000-5,100 is possible at some point.”
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is likely to retrace most of its yesterday’s pullback following yesterday’s earnings releases from MSFT, GOOG.
- Last Friday, stock prices were the lowest since February, indicating a correction of the medium-term advance.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist