Stocks: Will the Rally Continue?

S&P 500 and Nasdaq 100 reached new record highs, but is there any gas left?

Stocks rallied at the beginning of Wednesday’s trading session as investor sentiment improved following a slightly lower-than-expected Consumer Price Index release. The S&P 500 reached a new record high of 5,447.25, but the FOMC release led to some volatility. Ultimately, the index gained 0.85% after retracing slightly from the high. Once again, the market was led higher by a rally in Apple stock, which reached new record highs.

This morning, futures contracts are pointing to a 0.3% higher opening for the index following the Producer Price Index (PPI) release. The PPI was lower than expected at -0.2% month over month.

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 much improved, as indicated by the yesterday’s AAII Investor Sentiment Survey, which showed that 44.6% of individual investors are bullish, while 25.7% of them are bearish (down from last week's reading of 32.0%). 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 broke above its recent trading range, as we can see on the daily chart.

Stocks: Will the Rally Continue? - Image 1

Nasdaq 100 Rallied Above 19,500

The technology-focused Nasdaq 100 index reached a new record high of 19,556.89 yesterday and closed 1.33% higher. This morning, it is likely to open 0.7% higher following the PPI release.

Stocks: Will the Rally Continue? - Image 2

VIX Is Closer to 12 Again

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. Last week, the VIX came back towards 12. Yesterday, it was as low as 11.94, signaling less fear in the market.

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: Will the Rally Continue? - Image 3


Futures Contract Remains at Record High

Let’s take a look at the hourly chart of the S&P 500 futures contract. The new series (September) is trading along the 5,500 level this morning. It’s trading along new record highs following yesterday’s and today’s data.



The S&P 500 index is likely to open higher again, as investor sentiment remains elevated following the Producer Price Index data. However, more pronounced profit-taking action may be coming at some point. Nevertheless, the market is still trading within an uptrend.

Last 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 is likely to remain close to record highs following the producer inflation number.
  • Last week, stock prices rebounded and 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