Stocks are expected to open much higher, but will the uptrend continue?
Stock prices reacted negatively to the FOMC’s rate cut announcement yesterday, but this morning, the S&P 500 index is likely to open 1.7% higher following an overnight rally. Yesterday, the S&P 500 closed 0.29% lower after reaching a new record high of 5,689.75. Today, the market is likely to open at another new record high, retracing yesterday’s intraday decline.
The question is: will the uptrend continue, or is this just part of a volatile consolidation, potentially forming a topping pattern before a downward reversal? I still think that the market is forming a high, and the seasonal pattern will play out in such a way that indexes will set their highs in September, with the low of the correction occurring in October.
Therefore, I am maintaining a speculative short position, opened on Monday.
Investor sentiment improved, as shown by yesterday’s AAII Investor Sentiment Survey, which reported that 50.8% of individual investors are bullish, while only 26.4% of them are bearish, down from 31.0% last week.
The S&P 500 index remained below its July high yesterday, as we can see on the daily chart.
Nasdaq 100: Still Relatively Weak
The tech-heavy Nasdaq 100 lost 0.45% yesterday, following a pullback after the Fed’s announcement. It continued fluctuating around the 19,500 level.
The index remains relatively weaker than the broader market, trading below the local high from August 22 and significantly below the July 10 record high of 20,690.97. However, this morning, the Nasdaq 100 is expected to open 2.2% higher.
VIX Rebounded Amid Fed-Related Volatility
On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. However, a stock rebound last week pushed the VIX lower. Yesterday, it rebounded toward the 20 level.
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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
S&P 500 Futures Contract Rallying to New Highs
Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it dropped to a local low of around 5,680, but since then, it has been advancing. This morning, the market is breaking higher and reaching new record highs. A potential resistance level is at 5,800, with support in the 5,730-5,750 range.
Conclusion
Wednesday’s trading session ended on a bearish note, but this morning, the market is waking up to a different tone, with futures contracts rallying to new record highs. The S&P 500 is likely to open at a new record high, gaining 1.6%.
Yesterday, I noted “A "buy the rumor, sell the news" scenario seems likely, but a bullish breakout to new highs can't be ruled out either.” Today’s rally invalidates a quick reversal scenario, but the pace of the market’s advance suggests that a downward correction is likely at some point. However, the overall market picture remains very bullish.
I opened a speculative short position in the S&P 500 futures contract on Monday.
In my Stock Price Forecast for September 2024, I noted that, “the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. (…) sharp reversal suggests more volatility in September. Last month, I wrote that ‘August is beginning on a very bearish note, but the market may find a local bottom at some point.’ The same could be said today, and September will likely not be entirely bearish for stocks.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 is set to open much higher following yesterday’s FOMC release.
- The market may still be forming a topping pattern before a downward correction.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist