Stocks: Uncertainty Along New Highs

Stock prices remain close to records. Which direction is next?

The S&P 500 index reached yet another new record high on Tuesday at 5,490.38. Today, it is likely to extend the uptrend once more following yesterday’s holiday pause, but is the top nearing? It seems that some profit-taking price action may be on its way. This morning, futures contracts point to a 0.2% higher opening for the index.

In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.

However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”

Investor sentiment remained rather unchanged, as indicated by the AAII Investor Sentiment Survey yesterday, which showed that 44.4% of individual investors are bullish, while 22.5% of them are bearish (down from last week's reading of 25.7%). 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 index remains above its upward trend line, as we can see on the daily chart.

Stocks: Uncertainty Along New Highs - Image 1

Nasdaq 100 Nearing 20,000

On Monday, the technology-focused Nasdaq 100 index reached a new record high of 19,977.84, and on Tuesday, it remained unchanged, fluctuating within a narrow price range. This morning, it is likely to open 0.4% higher, remaining close to the 20,000 level.

Stocks: Uncertainty Along New Highs - Image 2

VIX Remains Relatively Low

The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Recently, the VIX came back towards 12. On Friday, it was as high as 13.45, and on Tuesday, it went closer to 12.

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: Uncertainty Along New Highs - Image 3


Futures Contract Remains Close to ATH

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Monday, it broke above the recent trading range and a resistance level of around 5,500. Since then, it has been slightly advancing, reaching a new record of around 5,588. There have been no confirmed negative signals so far; however, a profit-taking action may occur at some point. The support level is now at 5,540, among others.

Stocks: Uncertainty Along New Highs - Image 5


On Tuesday, I noted “Will stocks further extend their uptrend and reach new records despite some short-term overbought conditions? There have been no confirmed negative signals; however, later in the week, the market will get more economic data: the Unemployment Claims on Thursday, and on Friday – the important Flash Manufacturing PMI/ Flash Services PMI data. (…) On Friday, the ‘quadruple witching day’ may cause volatility.”

It seems that the market will fluctuate along its new highs at least till tomorrow’s derivatives contracts expirations. This morning, indexes are likely to slightly extend their uptrend, reaching new all-time highs. However, they may go sideways after the open.

On previous Friday, I noted “Will the market retrace some of its recent rally? The bearish argument is relatively thin trading, with only a handful of stocks like NVDA, MSFT, or AAPL responsible for the rally. On the other hand, the trend is still upwards, hence further advances are more likely”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 keeps extending its uptrend following Monday’s breakout; it may see a profit-taking at some point.
  • Stock prices reached new record highs despite mixed data and growing uncertainty.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist