S&P 500 remains at a new record, but is a correction coming?
Stocks extended their record-breaking run, with the S&P 500 index closing 0.51% higher on Wednesday, reaching a new all-time high of 5,539.27. The trading session was shortened due to Thursday’s holiday, and low volatility favored buyers.
This morning, the S&P 500 is likely to open 0.1% higher after the important jobs data release. The Unemployment Rate was slightly higher than expected at 4.1%, indicating a growing chance of easing monetary policy by the Fed.
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.”
Investor sentiment slightly decreased, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 41.7% of individual investors are bullish, while 26.1% of them are bearish. 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.
The S&P 500 index resumed its uptrend despite recently breaking down the upward trend line, as we can see on the daily chart.
Nasdaq 100 Rallied Above 20,000
On Wednesday, the technology-focused Nasdaq 100 index reached a new record high of 20,186.63 and closed 0.87% higher on new records in AAPL and MSFT stocks, among others.
Recently I kept repeating that it still appeared to be just a flat correction of the uptrend, and it proved accurate. This morning, the Nasdaq 100 is expected to open 0.3% higher. Is it approaching a local high before some downward correction? There are short-term overbought conditions, and the market is likely to top at some point.
VIX Remains Near 12: Low Fear in the Market
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.
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 Nears 5,600
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading basically flat after the jobs data. The market is at a new record high, with support levels at 5,560-5,580, among others.
Conclusion
The stock market is poised to extend the uptrend this morning, as investor sentiment remained elevated following a higher-than-expected Unemployment Rate. There is still uncertainty about a possible correction amid further economic data and earnings releases. The risk of a downward correction is increasing.
Quoting my Monday’s 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 neutral.
Here’s the breakdown:
- The S&P 500 reached a new record high on Wednesday; this morning, it is likely to open slightly higher, but a profit-taking action may occur, leading to consolidation.
- Investors are waiting for more economic data and the coming quarterly earnings season.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist