Stocks failed to extend their rebound yesterday. What's next?
Stocks pulled back after a higher open yesterday, as volatility continued to dominate the market following the recent sell-off. The S&P 500 index closed 0.77% lower after reaching a local high of around 5,330. It seems that uncertainty is here to stay, despite today’s bullish expectations ahead of the open.
The investor sentiment worsened this week, as indicated by yesterday's AAII Investor Sentiment Survey, which showed that 40.5% of individual investors are bullish, while 37.5% of them are bearish – up from 25.2% last week. Given the scale of recent declines, this is understandable; however, over 40% bullish sentiment is still relatively positive and casts doubt on a potential rebound in stocks.
The S&P 500 index remained below the 5,300 level, as we can see on the daily chart.
Nasdaq 100: Below 18,000
The technology-focused Nasdaq 100 lost 1.16% yesterday, following an opening that was over 1% higher. Today, the market is likely to open 1.1% higher, extending its short-term uncertainty.
It’s likely that the market will experience a consolidation, although many investors hope for a V-shaped rally from the current levels.
VIX: Still Close to 30
The VIX index, a measure of market fear, accelerated its advance on Friday, nearing 30, and on Monday reached as high as 65.73—the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflected significant fear in the market. Yesterday, the VIX remained below 30, yet it is still relatively high, indicating continued 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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
Futures Contract Pulled Back Towards 5,200
Let’s take a look at the hourly chart of the S&P 500 futures contract. On Monday, it traded as low as 5,120, and yesterday, it rebounded to a local high of around 5,359. Then, it retraced its rebound, nearing the 5,200 level again. This morning, the market is higher after the Initial Claims data, trading closer to the resistance level of 5,280-5,300.
Conclusion
In my Stock Price Forecast for August on Friday, 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 market is about to open 0.9% higher this morning, following better-than-expected Unemployment Claims data. The S&P 500 will likely extend its consolidation, giving bulls another glimmer of hope.
Yesterday, I wrote “The most likely scenario appears to be a short-term consolidation, which could take the form of a bottoming pattern (bullish case) or simply a flat correction of the downtrend before another leg lower.” This is still true, as both scenarios seem to remain in play.
My short-term outlook is now neutral.
Here’s the breakdown:
- The S&P 500 index accelerated its sell-off on Monday, reaching its lowest level since early May.
- The market found a short-term bottom, but this may only be temporary; no positive signals are evident.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist