Stocks extended their declines – is this still a correction or is it a new downtrend?
Stock prices have extended their Friday’s decline, with the S&P 500 index closing 0.50% lower yesterday. It broke below the 6,000 level, reaching its lowest point since February 3. The market has retraced most of this month’s advances, but this could still be part of a consolidation that began in the first half of January after the index rallied to a new record. Today, the S&P 500 is expected to open 0.1% higher.
Investors are awaiting the key CB Consumer Confidence release at 10:00 a.m., though the main focus will be on NVDA quarterly earnings, set to be released tomorrow after close.
Investor sentiment remained relatively weak last week, as shown by the Wednesday’s AAII Investor Sentiment Survey, which reported that 29.2% of individual investors are bullish, while 40.5% of them are bearish.
The S&P 500 index pulled back below the 6,000 level, as we can see on the daily chart.
Nasdaq 100: Relatively Weaker
The Nasdaq 100 closed 1.21% lower on Monday, extending its more than 2% sell-off from Friday. The index continues to retrace its recent gains after reaching a record high of 22,222.61 last Wednesday. Today, the Nasdaq 100 is expected to open virtually flat, and while a rebound is possible, the technical outlook remains bearish in the short term.
VIX: Back to 20
The VIX index, a measure of market volatility, has been recently moving along the 15 level. On Friday, it surged toward 20, reaching a daily high of 19.03, and yesterday, it climbed further to 20.24, signaling increased fear among investors.
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 Hovers Around 6,000
This morning, the S&P 500 futures contract is rebounding from an overnight low of around 5,978. Is the market forming a short-term bottom near the 6,000 support level? That seems possible, though a consolidation may occur as investors await NVDA’s earnings release tomorrow.
Conclusion
Stocks are expected to open slightly higher today. The S&P 500 is likely to fluctuate near the 6,000 level, but is it forming a bottom before an upward reversal? It’s too early to say, but overall, the market continues its weeks-long consolidation.
The recent rally was fueled by hopes for a resolution to the Russia-Ukraine conflict.
In Friday’s analysis, I mentioned that “in the near term, the market may consolidate or face profit-taking, with investors reacting to geopolitical developments and upcoming economic data.”
This has proven accurate, and more uncertainty may be ahead.
In my Stock Price Forecast for January 2025, I noted “...recent rallies have provided selling opportunities. What will February bring? The earnings season is in full swing, likely adding to volatility. Political developments are increasing uncertainty. The market's ongoing consolidation since November may be forming a medium-term topping pattern ahead of some more meaningful downward correction. However, no confirmed bearish signals have appeared yet.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to fluctuate following its pullback.
- The stock market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist