Stocks: Uncertainty Following Producer Inflation Release

Stocks continued their rebound, but will they reach new record highs?

The release of the higher-than-expected Consumer Price Index (CPI) on Tuesday led to a pullback in stocks. However, on Wednesday, the S&P 500 index gained almost 1% as dip-buying prevailed once again. Yesterday, the market continued advancing closer to its Monday record high.

Recently, the stock market continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote last Wednesday, “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.”

This morning, futures contracts are pointing to a 0.2% lower opening of the trading session. So, the S&P 500 index may retrace some of the rebound from the last three days. Today’s key economic data, the Producer Price Index, has come in higher than expected at +0.3% month-over-month.

Investor sentiment has worsened a bit; Wednesday’s AAII Investor Sentiment Survey showed that 42.2% of individual investors are bullish, while 26.8% 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.

On Tuesday, I mentioned, "The market may return to a month-long upward trend line, currently around 4,950", and indeed, the S&P 500 did just that, briefly dipping below that line. The previous highs and lows from January acted as support levels around 4,900, and yesterday, the index came back above 5,000, as we can see on the daily chart.

Stocks: Uncertainty Following Producer Inflation Release - Image 1

Nasdaq 100 Is Relatively Weaker

On Monday, the technology-focused Nasdaq 100 index reached a new all-time high at 18,041.45, and on Tuesday, it sold off below the 17,500 level.

Recently, it has been relatively weaker than the broader stock market, but last week, it caught up with the S&P 500. However, Nasdaq’s rally was led by a handful of “FANG” stocks like META, NVDA and MSFT. Last Wednesday, I wrote about the NYSE FANG+ index. Yesterday, the Nasdaq 100 was weaker than the broader stock market, gaining just 0.21%.

Stocks: Uncertainty Following Producer Inflation Release - Image 2

VIX Is Back at 14

The VIX index, also known as the fear gauge, is derived from option prices. Last week, it fell below the 13 level, indicating a lack of fear in the market as stock prices reached record highs. However, on Tuesday, it broke above the previous local highs of around 15.00-15.50, peaking at 18. On Wednesday and yesterday, it retraced closer to the 14 level.

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 Following Producer Inflation Release - Image 3


Futures Contract Went Close to Record High

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Tuesday, the market sold off following the CPI announcement. The local low was around 4,940, and since then, the market has been retracing the declines. This morning, it’s trading lower following the PPI release. The resistance level remains at around 5,040-5,060.

Stocks: Uncertainty Following Producer Inflation Release - Image 5


The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index breaking above 5,000, and the Nasdaq 100 index getting close to 18,000. In my analysis on Tuesday, I noted that, “in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.”. Indeed, the correction occurred pretty fast, with the inflation number contributing to the downturn. However, the last two days have shown that there is still plenty of optimism left in the market. In fact, the S&P 500 is likely to attempt to break the record high at some point.

This morning, the S&P poised to open 0.2% lower. In the short term, we can expect consolidation and an increased volatility. The index will likely fluctuate around support and resistance levels as investors seek to capitalize on profits following the rally from last year's late October low.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to fluctuate following its downward correction earlier in the week.
  • A longer consolidation phase may ensue, following an extended rally over the past months.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist