Stock prices continued to decline, but is there further downside potential?
Stock prices extended their declines on Thursday, with the S&P 500 approaching the 5,500 level and closing 0.78% lower. This time, it was the Dow Jones Industrial Average that led the declines, closing 1.29% lower. Profit-taking may continue today, though the S&P 500 is likely to open 0.2% higher due to an overnight rebound in futures contracts. The market may experience some short-term uncertainty ahead of the major quarterly earnings releases next week.
On July 09, I opened a speculative short position in S&P 500. This position is currently profitable.
Investor sentiment increased significantly on Wednesday, as indicated by the AAII Investor Sentiment Survey, which showed that 52.7% of individual investors are bullish, while 23.4% of them are bearish.
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.”
The S&P 500 index approached its June consolidation and the 5,500 level yesterday, as we can see on the daily chart.
Nasdaq 100 Slightly Extending the Decline
Yesterday, the technology-focused Nasdaq 100 index was as low as 19,576 before rebounding and closing 0.48% lower. It approached multi-month upward trend line and a potential support level of 19,500. The resistance level is now at 20,000.
Last Thursday, I concluded that “There are short-term overbought conditions, and the market is likely to top at some point.” This proved accurate with the recent sharp downward reversal and a sell-off this week. Today, the Nasdaq 100 is expected to open 0.2% higher, but it may be another 'dead cat bounce' attempt.
VIX: Highest Since Late April
The VIX index, a measure of market fear, has recently been hovering around the 12-13 level, indicating relatively low fear. However, it reached a local high of 16.43 yesterday, confirming a downward correction in the stock 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: Consolidation Following Declines
Let’s take a look at the hourly chart of the S&P 500 futures contract. Earlier this week, it fluctuated above 5,700 before reversing lower. Yesterday, the market broke below 5,600 and has been fluctuating since. This morning, it slightly extended the decline before rebounding to around 5,600. Support is now at 5,575, and resistance at 5,625.
Conclusion
Stock prices accelerated their short-term downtrend yesterday, with the S&P 500 reaching its lowest level since July 3. The question remains whether this is just a correction before another leg up or the start of a deeper downtrend. With earnings from major companies next week, volatility is likely, and there may be some retracement of recent declines. Generally, earnings releases are met with 'sell-the-news' price action.
My speculative short position in the S&P 500 futures contract, opened on July 9, is currently profitable.
Quoting my 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 index extended its short-term declines, approaching the crucial 5,500 level yesterday.
- Investors are waiting for 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