The S&P 500 was less than 1% below its record. Will it continue to rally?
Stocks went sideways on Tuesday, with the S&P 500 index closing 0.20% lower after reaching a new local high of 5,620.51. It was less than 1% below its July 16 record high of 5,669.67, retracing almost all of its declines that led to panic selling and the August 5 local low of 5,119.26. This morning, the S&P 500 is likely to open 0.2% higher, and it may see further consolidation.
Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.
Although there have been no confirmed negative signals, I decided to open a speculative short position yesterday.
Last Thursday, I wrote “It still appears to be a correction following a decline that started in mid-July; however, the market may also advance towards a double-top or new highs.” This remains accurate as we could see a medium-term consolidation following early August volatility.
Investor sentiment improved, as indicated by last Wednesday's AAII Investor Sentiment Survey, which showed that 42.5% of individual investors are bullish, while 28.9% of them are bearish – down from 37.5% last week.
The S&P 500 index remained above its August 1 local high yesterday, as we can see on the daily chart.
Nasdaq 100: Closer to 20,000
The technology-focused Nasdaq 100 lost 0.24% yesterday after gaining 1.3% on Monday. It has continued to advance, following the broader stock market, although it remains relatively weaker after the early August sell-off. The index is being driven higher by a few key stocks, including NVDA, which rallied by over 40% from its low point. This is significant given its multi-trillion-dollar market cap.
This morning, the Nasdaq 100 is likely to open 0.1% higher. The resistance level remains around 20,000, marked by the July 17 daily gap down of 20,080.27 to 20,266.51, among others.
VIX Rebounding from 15
Last Monday, the VIX index, a measure of market fear, reached a new long-term high of 65.73 - the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflected significant fear in the market. However, it has since been retracing, dropping as low as 14.46 on Monday, indicating much less fear. The VIX has returned to 'normal' levels, considering the past few months.
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.
Futures Contract Going Sideways
Let’s take a look at the hourly chart of the S&P 500 futures contract. On Monday, it broke above the 5,600 level, accelerating its uptrend.
As I wrote yesterday, “The market seems to be heading toward new record highs but is becoming increasingly overbought and susceptible to a short-term correction. The recent volatility suggests a potential shift in the long-term outlook, and the market may be entering a medium-term consolidation.”
Conclusion
In my Stock Price Forecast for August, I noted “a sharp reversal occurred, and by the end of the month, the S&P 500 experienced significant volatility following the sell-off. August is beginning on a very bearish note, but the market may find a local bottom at some point.”
The rebound from the previous Monday’s low has been significant, and bulls have regained control of the market.
On Friday, I questioned “Will this lead to new record highs? For now, it still seems like a correction within the downtrend. However, if the market breaks above its early August local high, the road to re-test the all-time high will be open.”
The S&P 500 broke above its August high, which may be a bullish sign, but in the short term, there is an increasing likelihood that the market will reach a top soon. Today, the index is likely to open slightly higher; investors will be waiting for the important Fed Meeting Minutes release at 2:00 p.m., but all the attention seems to be focused on Friday’s Fed Chair Powell’s speech at the Jackson Hole Symposium.
I decided to open a speculative short position in the S&P 500 futures contract yesterday.
On the previous Friday, I wrote “(…) rebound brought some hope for bulls, but it seems they are not out of the woods yet. The recent sell-off was significant, and it will likely take more time to recover.
There is also a chance that the current advances are merely an upward correction, and the market could revisit its lows at some point.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index fluctuated following the recent advances yesterday.
- Today, the market is likely to open slightly higher, but a correction may be looming; Fed data in focus.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist