Stocks: Uncertainty Looms Amid Earnings and Fed

The S&P 500 remains close to its new all-time high, but the question is, is there any gas left?

There is a lot more uncertainty in the market right now, and despite reaching a new record, the uptrend is no longer as evident. On Wednesday, the S&P 500 index set a new all-time high at the level of 4,903.68 before retracing most of the advance. Yesterday, it came back up closer to 4,900. However, it's becoming more challenging to speak definitively about trend following, and if someone is still bullish, they should consider at least partially closing positions.

Surprisingly, investor sentiment has slightly worsened once again - 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.

Nevertheless, investor sentiment is still historically bullish ahead of the upcoming quarterly earnings releases and the expected monetary policy easing by the Fed this year.

Last Friday, stock prices broke above their month-long trading range, invalidating any potential medium-term topping pattern scenarios. On Monday, I wrote that “in the short term, one would expect some downward correction as the market becomes increasingly overbought”. Despite a new high, it seems that a correction scenario is likely in the near term. The market rallied from its last Wednesday’s daily low of around 4,715 – an advance of almost 190 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 just 0.1% lower, despite Intel stock declining by almost 10% following yesterday’s quarterly earnings release. Investors will be awaiting more important earnings reports next week, including key reports from AAPL, AMD, GOOG, META, MSFT, among others. Additionally, on Wednesday, the markets will get the highly anticipated Federal Funds Rate release from the Fed.

The market remains close to the 4,900 level, as we can see on the daily chart.

Stocks: Uncertainty Looms Amid Earnings and Fed - Image 1

Nasdaq Going Sideways Too

On Wednesday, the technology-focused Nasdaq 100 index reached a new all-time high at the level of 17,665.26. Yesterday, it traded sideways, but this morning, it's expected to open 0.3% lower following Intel's quarterly earnings release, with the stock trading almost 10% lower in the pre-market.

In early January, the Nasdaq 100 bounced sharply, followed by another advance and closing above the important daily gap down of 16,687-16,758, which was a positive signal. Consequently, it broke to new record highs last week. However, a correction may occur at some point as the market is currently technically overbought in the short term.

Stocks: Uncertainty Looms Amid Earnings and Fed - Image 2

VIX Rebounding Again

The VIX index, also known as the fear gauge, is derived from option prices. Last week on Thursday, it came back below the 14.50 level, marked by the previous local highs. Subsequently, it continued its decline in response to advancing stock prices. On Wednesday, it rebounded from the previous local lows in the 12.00-12.50 range, and yesterday, it further gained as stock prices traded sideways.

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 Looms Amid Earnings and Fed - Image 3

Futures Contract Still Above 4,900

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it is trading above the 4,900 level again. There have been no confirmed negative signals so far; however, the market became increasingly overbought in the short-term. The support level remains at 4,880-4,900, marked by the recent consolidation.

Stocks: Uncertainty Looms Amid Earnings and Fed - Image 5

Stocks are likely to extend their consolidation further at the opening of today’s trading session. The quarterly earnings release from Intel yesterday worsened sentiment a bit, but the market is still close to its record high from Wednesday. Nevertheless, investor sentiment remains elevated ahead of next week's key quarterly corporate earnings releases, though a correction or consolidation 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, last 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 extends its consolidation along the new record high, but more uncertainty in the near term may come.
  • The breakout above the recent highs marked a positive signal; however, it’s uncertain whether the market won’t retrace some of the rally. The index may be nearing 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