Stock prices remain close to record highs. Is selling this rally justified?
Stock prices remained unchanged yesterday, with the S&P 500 index gaining 0.07%. However, the broad stock market gauge reached yet another new record high at 5,590.75. Is it getting closer to a correction? Today is the second day of a testimony from Fed Chair Powell at 10:00 a.m., which may lead to some volatility again. Although there have been no confirmed negative signals, I decided to open a speculative short position yesterday.
The S&P 500 is likely to open 0.2% higher this morning, as indicated by futures contracts. Investors are waiting for Powell's testimony today, and the Consumer Price Index tomorrow.
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 last week, 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 broke above its two-week-long trading range last Wednesday, as we can see on the daily chart.
Nasdaq 100 Set New High
Yesterday, the technology-focused Nasdaq 100 index reached a new record high of 20,543.90, led by advances in AAPL and NVDA stocks, among others. It closed just 0.07% higher, indicating a growing uncertainty following recent record-breaking advances. This morning, the Nasdaq 100 is expected to open 0.3% higher. There are short-term overbought conditions, and the market is likely to top at some point.
VIX Crawling Along 12.5
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 Trading Along Record Highs
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading close to a record high, well above the support level of around 5,600. Potential resistance level is at 5,650.
Conclusion
Stocks are likely to open slightly higher this morning, retracing their yesterday’s intraday slight pullback. Again, all eyes will be on Fed Chair Powell’s testimony at 10:00 a.m. Although he is not likely to add much new to the overall policy picture, it may mark a ‘sell the news’ event like yesterday. Additionally, we will get the key CPI release tomorrow, and the earnings season begins with big banks reporting on Friday. There are more and more indicators pointing to a correction or downward reversal at this moment. The risk of a downward correction is increasing.
Therefore, I decided to open a speculative short position in the S&P 500 futures contract yesterday.
Quoting my last 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 bearish.
Here’s the breakdown:
- The S&P 500 keeps extending its record-breaking advance, but a correction may be looming.
- Investors are waiting for important data this week and the coming quarterly earnings season.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist