Are stock prices closer to profit taking? Is the CPI data ‘sell the news’ event?
The stock market extended its advances on Wednesday, with the S&P 500 index gaining 1.02% and setting a new record high of 5,635.39. Investor sentiment has increased significantly, as indicated by the AAII Investor Sentiment Survey yesterday, which showed that 49.2% of individual investors are bullish, while only 21.7% of them are bearish. The question arises: are we getting closer to a peak and a downward correction? This morning, the index is about to open 0.1% higher following the important Consumer Price Index (CPI) release. The CPI has been released at -0.1% month-over-month, lower than the expected +0.1%.
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 keeps reaching new record highs, as we can see on the daily chart.
Nasdaq 100: Another New Record High
Yesterday, the technology-focused Nasdaq 100 index reached a new record high of 15,690.97, led by more advances in AAPL and NVDA stocks, among others. There are short-term overbought conditions, and the market is likely to top at some point. This morning, the Nasdaq 100 is likely to open 0.2% higher.
VIX Bounced Despite Rallying Stocks
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. Yesterday, it got closer to the 13 level despite further stock prices advances.
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. The CPI led to more advances and a breakout above the overnight trading range. The nearest important support level is now at around 5,580, and the next one is at 5,550, marked by the recent lows.
Conclusion
This morning, we received the key CPI release, which was lower than expected, in fact a negative -0.1%. The futures contract extended the advance, indicating a 0.1% higher opening for the index. Despite yesterday’s advance of over 1%, there are more and more indicators pointing to a correction or downward reversal at this moment. The risk of a downward correction is increasing.
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 is likely to fluctuate following the CPI release.
- 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