Uncertainty at New Record: Which Direction Is Next?

Is the stock market poised for a short-term correction, or will the uptrend continue?

The S&P 500 reached yet another record high yesterday (5,325.49), but it closed the day 0.21% lower after an intraday retreat. On Wednesday, the market broke above local highs from March and April, completely retracing the recent 6% correction. Yesterday, the main indices were the highest in history, with the Dow Jones Industrial Average breaching slightly the 40,000 level.

On Monday, I noted ”The question arises: will the S&P 500 continue its bull market and reach a new record? It seems more and more likely; however, the index may see some short-term uncertainty as it approaches a series of the previous local highs and resistance levels.”

This morning, S&P 500 futures are indicating a slightly higher opening for the index. However, the most likely intraday scenario is more sideways trading action. Some investors seem to be taking profits off the table, yet no confirmed negative signals are evident.

Investor sentiment remained high, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that 40.9% of individual investors are bullish, while only 23.3% 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.

The S&P 500 has accelerated its uptrend, breaking above the previous highs, as we can see on the daily chart.

Uncertainty at New Record: Which Direction Is Next? - Image 1

Nasdaq 100 Remains Above 18,500

The technology-focused Nasdaq 100 index reached a new record high of 18,669.50 yesterday, before closing 0.21% lower. Today, it is likely to open virtually flat again. The nearest important support level is now at 18,400, marked by the previous highs.

Uncertainty at New Record: Which Direction Is Next? - Image 2

VIX Staying 12.50

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, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 - the highest since late October, signaling fear in the market. Recently, it was going lower again, and yesterday, it was as low as 12.33, showing complacency 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.

Uncertainty at New Record: Which Direction Is Next? - Image 3


Futures Contract Fluctuating Above 5,300

Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it backed off from a new all-time high of around 5,349, and this morning, it is fluctuating along the 5,320 level. For now, it looks like a relatively flat correction of the uptrend.

Uncertainty at New Record: Which Direction Is Next? - Image 5


Stock prices will likely extend their short-term fluctuations this morning. The S&P 500 index remains close to a new record high, and no confirmed negative signals are evident as investor sentiment remains elevated following a record-breaking rally. However, that overly bullish sentiment, coupled with low VIX readings, may be worrying for the market in the short term. Some profit-taking may be on the horizon.

Last Tuesday, I wrote “(…) the market may pause or even retrace some gains. With most of the earnings season over (there is only one very important release left - NVDA on May 22) and the FOMC Rate Decision release behind us, expect a period of uncertainty.”

In my Stock Price Forecast for May, I noted “Where will the market go in May? There's a popular saying: 'Sell in May and go away,' but statistics don't consistently support such clear seasonal patterns or cycles. The safe bet for May is likely sideways trading, with investors digesting recent data suggesting that inflation may not be transitory, and the Fed could maintain its relatively tight monetary policy. However, economic data isn't entirely negative, and strong earnings from companies may continue to fuel the bull market.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 is likely to extend a short-term consolidation following an intraday retreat from yesterday’s new record.
  • On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance. This week, the S&P 500 retraced all of its mid-April sell-off, reaching a new record high above 5,300.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist