Stocks to open relatively flat after overnight futures’ sell-off – is this a bottoming pattern?
Thursday’s trading session didn’t change that much, with the S&P 500 index dropping 0.22%, and remaining above the 5,000 level. On Monday, a failed rebound led to another decline and a breakdown below the 5,100 level. Yesterday, the market slightly extended its downtrend; however, it still looks like a correction following a medium-term uptrend from November.
Overnight, the S&P 500 futures contract sold off on the Middle East conflict escalation news, but the decline was very short-lived, and currently, the market is just slightly below its yesterday’s closing prices. The S&P 500 index is likely to open 0.2% lower, as indicated by the futures contract.
In my Stock Price Forecast for April, I noted, “Closing the month of March with a gain of 3.1%, the question arises: Will the S&P 500 further extend the bull market in April, or is a downward correction on the horizon? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.”
The investor sentiment has worsened this week, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that 38.3% of individual investors are bullish, while 34.0% of them are bearish, a big increase from last week's 24%. 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.
On Wednesday and yesterday, the S&P 500 traded at a significant support level, marked by the daily gap up from February 22 (4,983.21-5,038.83). In early April, the index broke its two-month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 Continued Lower
Recently, the technology-focused Nasdaq 100 index sold off below the 18,000 level, and yesterday, it was the lowest since late February. The Nasdaq 100 is likely to open 0.3% lower this morning, after retracing most of its overnight sell-off. Investors will be waiting for the coming earnings releases from big tech companies. Yesterday’s release form NFLX led to an after-hours sell-off in the stock, and this morning it is likely to open 6% lower.
VIX Backs Off from Highs
The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, recent market volatility has led to an increase in the VIX. On Friday, it surpassed 19, and this week, it remained relatively high – the highest since late October. Yesterday, it came back to the 18 level though, indicating slightly less 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 Broke 5,100
Let’s take a look at the hourly chart of the S&P 500 futures contract. Overnight, it sold off to a new low of around 4,963, before quickly retracing that move and getting back above 5,000. This means more volatility is likely; the resistance level is at 5,080-5,100, with support level at 5,000.
The market has been in a slight downtrend since the start of the month, and on Monday, it accelerated the move lower.
Conclusion
The S&P 500 index accelerated its downtrend on Monday, extending a correction from the March 28 record high of 5,264.85. Investor sentiment worsened on Middle East tensions, strong U.S. dollar. Yesterday, the market went very close to the 5,000 level, which is a potential support level.
Today, the S&P 500 is likely to open only slightly lower despite a big sell-off on Middle East news overnight. Is this a short-term bottoming pattern? It’s hard to say. For now, it looks like a short-term downtrend. Therefore, it's prudent to adopt a defensive approach and refrain from attempting to buy the dips in the near future.
On April 2, I wrote that “In April, we will see a usual series of important economic data, but with the Fed leaning towards easing monetary policy, we should perhaps pay more attention to the quarterly earnings season. However, good earnings may be met with a profit-taking action this time. The market appears to be getting closer to a correction.”
Then, I added: “It appears that profit-taking is happening. Is this a new downtrend? Likely not, however, a correction towards 5,000-5,100 is possible at some point.”
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is likely to further extend a consolidation along the 5,000 level.
- Stock prices are the lowest since mid-February, indicating a correction of the medium-term advance.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist