Uncertainty Lingers as Stocks Stay Near Records

Investors await economic data. Will stocks extend their consolidation?

Stocks didn’t do much on Monday, with the S&P 500 index extending a consolidation below the 5,500 level and closing 0.31% lower. The market continued to fluctuate following its Thursday retreat from a new record high of 5,505.53. Today, the index is likely to open 0.2% higher, as indicated by futures contracts. So, it is poised to further extend uncertainty. However, investors will be waiting for the important CB Consumer Confidence release at 10:00 a.m., and the market may see some volatility.

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.”

Last week, investor sentiment remained unchanged, as indicated by the AAII Investor Sentiment Survey last Wednesday, 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 broke its upward trend line on Friday, as we can see on the daily chart.

Uncertainty Lingers as Stocks Stay Near Records - Image 1

Nasdaq 100 Extended Losses

The technology-focused Nasdaq 100 index reached a new record high of 19,979.93 on Thursday, before retracing some of the recent advances. On Friday, it went sideways despite economic data and “quadruple witching” derivatives expiration, and yesterday, it closed 1.15% lower, mainly on NVDA drop (-6.7%).

Is this a top? For now, it looks like a correction; however, a breakdown below 19,500 would likely increase selling pressure. Yesterday, the index closed slightly below that level, but this morning, it is expected to rebound by 0.5%.

Uncertainty Lingers as Stocks Stay Near Records - Image 2

VIX Is Still Close to 13

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. Since Thursday, it has been closing above the 13 level, showing increasing 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.

Uncertainty Lingers as Stocks Stay Near Records - Image 3


Futures Contract – More Consolidation

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Thursday, it reached a new high of around 5,588, and on Friday, it was trading along the 5,530 level. This week, it is still trading along that level, with resistance at 5,550 and support at 5,520.

Uncertainty Lingers as Stocks Stay Near Records - Image 5


Tuesday’s trading session is likely to open 0.2% higher for the S&P 500 index. Has the uptrend reversed last Thursday? For now, it’s a consolidation following Thursday’s retreat. It seems that the market may go sideways for some time. Investors will be waiting for more economic data this week, besides today’s CB Consumer Confidence release at 10:00 a.m.: the GDP on Thursday, and the important Core PCE Price Index on Friday.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 reversed lower from a new record high on Thursday; for now, it’s a downward correction.
  • Recently, stock prices were reaching 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