Stocks have pulled back from their new record highs. Could this be a local top?
The stock market kept reacting to the Wednesday’s FOMC Rate Decision release yesterday, with the S&P 500 index gaining 0.32% after reaching a new record high of 5,261.10. On Wednesday, it broke above its two-week-long trading range, and yesterday, it essentially fluctuated following a higher opening of the trading session.
This morning, the S&P 500 futures contract is down by 0.2%, indicating a lower opening for the index. Consequently, the market is likely to fluctuate following its post-Fed rally. The question remains: will that surge lead to a short-term or intraday downward correction and a potential retracement of the advance? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.
On March 1, I mentioned about February, “Despite concerns about stock valuations, the market rallied to new record highs, fueled by hopes of the Fed's monetary policy pivot and the AI revolution.”. And this week, it was all about that Fed pivot, hence a positive market reaction.
While indexes were hitting new record highs, most stocks were essentially moving sideways. So, the question is – is this a topping pattern before a more meaningful correction? Still, there have been no confirmed negative signals; however, one might consider the possibility of a trend reversal.
Recently, the stock market continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote on February 7, “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.” Despite the rally, this still holds true. The S&P 500 index seems to be crawling a wall of worry here.
Quite surprisingly, the investor sentiment worsened a bit; Wednesday’s AAII Investor Sentiment Survey showed that 43.2% of individual investors are bullish, while 27.2% of them are bearish, up from 21.9% last week. 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.
Recently, the S&P 500 index bounced from an over month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 - New Record High
Yesterday, the technology-focused Nasdaq 100 index reached a new record high of 18,464.70, extending its long-term uptrend by almost 50 points. However, it retraced most of the intraday advance, closing just 0.44% higher. The market is likely to retreat back within the recent consolidation, indicating a failed breakout attempt.
VIX Bounced From 12.50
The VIX index, also known as the fear gauge, is derived from option prices. Yesterday, the index dipped slightly below the 12.50 level, before bouncing closer to 13 later in the day. It was the lowest since mid-January, indicating a lack of 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 Still Trading Along 5,300
Let’s take a look at the hourly chart of the S&P 500 futures contract. On Wednesday, it broke above the recent trading range as markets reacted to the FOMC release. This morning it’s still trading along the 5,300 level. The support level remains at 5,260, marked by the previous highs.
Conclusion
Today, the S&P 500 index is likely to open slightly lower following an intraday downward reversal on Thursday. More pronounced profit-taking action may be in cards at some point. However, as of now, there have been no confirmed negative signals.
In my Stock Price Forecast for March, I noted “So far, stock prices have been trending upwards in the medium to long term, reaching new record highs. The prudent advice one could give right now is to remain bullish or stay on the sidelines if one believes stocks are becoming overvalued and may need a correction. It's likely that the S&P 500 will continue its bull run this month. However, we may encounter a correction or increased volatility at some point as investors start to take profits off the table.”
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 reached a new record high following the Fed news on Wednesday, but today, it is likely to pull back or extend a consolidation.
- Stock prices are getting more overbought, and another short-term correction may be coming.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist