Is the S&P 500 forming a medium-term high, or is it just consolidating before another leg up?
Stock prices were gaining on Friday, but the session ended on a rather negative note, with the S&P 500 index retreating from a new record high of 5,655.56 and closing 0.55% higher. The market has essentially extended its short-term consolidation following last Wednesday’s rally, Thursday’s CPI release, and Friday’s PPI release.
This morning, the S&P 500 index is likely to open 0.3% higher, as indicated by futures contracts. The market hasn't reacted significantly to the assassination attempt on Trump; investors will be waiting for a series of quarterly earnings releases this week.
On Friday, I wrote “Thursday’s trading session brought declines for the stock market (…) It was a typical sell-the-news price action following lower-than-expected consumer inflation data. But was that a change of trend or just a quick downward correction? For now, it looks like a correction, but it seems that bulls will be in a defensive stance for a while.”
Last Tuesday I decided to open a speculative short position (S&P 500 futures contract). In my opinion, the position is still justified.
Investor sentiment has increased significantly, as indicated by the AAII Investor Sentiment Survey last Wednesday, which showed that 49.2% of individual investors are bullish, while only 21.7% of them are bearish.
As I mentioned in my stock price forecast for July, “While more advances remain likely, the likelihood of a deeper downward correction also rises. Overall, there have been no confirmed negative signals so far, but the May gain of 4.8% and June gain of 3.5% suggest a more cautionary approach for July (…) The market will be waiting for the quarterly earnings season in the second half of the month. Plus, there will be a series of economic data, including the CPI release on July 11, the Advance GDP number on July 25, and the FOMC Rate Decision on July 31.”
The S&P 500 index remains near its record high, as we can see on the daily chart.
S&P 500: Weekly Reversal?
Compared to the previous Friday’s closing price, the index gained 0.87%, however, closing well below its weekly high. There have been no confirmed negative signals, but there are signs that the market is getting ready for a correction or a consolidation. The nearest important support level is at 5,450-5,500, marked by local lows from the second half of June.
Nasdaq 100: Relatively Weaker
The technology-focused Nasdaq 100 index closed 0.59% higher on Friday, retracing some of its Thursday’s decline of 2.2%, however, not reaching a new record high like the S&P 500.
On Thursday, I concluded that “There are short-term overbought conditions, and the market is likely to top at some point.” This proved accurate with the Nasdaq 100 reversing sharply from its Wednesday’s record high. This morning, the Nasdaq 100 is likely to open 0.4% higher, extending a consolidation ahead of the important big tech earnings releases next week.
VIX: Back Below 13
The VIX index, also known as the fear gauge, is derived from option prices. Recently, it has been hovering around the 12 level, which historically is relatively low, indicating low fear in the market. On Friday, it closed slightly below the 12.5 level, indicating low 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.
Futures Contract: Just Below 5,700
Let’s take a look at the hourly chart of the S&P 500 futures contract. Wednesday’s CPI release led to a pullback from a new record high of around 5,708, and on Friday, it traded as low as 5,621. However, Friday’s cash market trading session brought back optimism, and the contract reached 5,708 once again. This morning, it’s trading below the 5,700 level. The support level remains at around 5,580-5,620, marked by the recent highs.
Conclusion
Last week’s inflation releases and the beginning of the earnings season brought some volatility for the S&P 500 index. On Friday, it reached a new record high, but the session wasn’t clearly bullish, with the index closing well below its high. The index is likely to open 0.3% higher today. It remains relatively close to the all-time high, but the risk of a more pronounced downward correction is increasing.
I opened a speculative short position in the S&P 500 futures contract last Tuesday.
Quoting my stock price forecast for July, “Investors continue pricing in the Fed’s monetary policy easing that is supposed to happen this year. Hence, a medium-term downward reversal still seems a less likely scenario. However, the recent record-breaking rally may be a cause for some short-term concern as a downward correction may be coming.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index fluctuated following last week’s inflation data; it may be marking a topping pattern before some downward correction.
- Investors are waiting for the coming quarterly earnings season.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist