Stock prices retreated from records, but is this a new short-term downtrend?
Stocks retraced all of their gains from last week, with the S&P 500 index declining by 1.02% yesterday. The market reversed from its Monday's new record high of 5,149.67, falling back below the 5,100 level. What caused the decline? Most likely, it was simply profit-taking action amid weaker-than-expected ISM Services PMI data and ahead of today’s Fed Chair Powell’s Testimony (scheduled at 10:00 a.m.).
On Friday, I mentioned about February, “Despite concerns about stock valuations, the market rallied to new record highs, fueled by hopes of the Fed's monetary policy pivot and the AI revolution.”. And yet, it was the same story again on the first trading day of March. However, on Monday, some profit-taking emerged, and on Tuesday, a full-scale downward correction occurred.
While indexes were hitting new record highs, most stocks were essentially moving sideways. So, the question is – is this just a pause within an uptrend or some topping pattern before a more meaningful correction? Still, there have been no confirmed negative signals; however, one might consider the possibility of a trend reversal.
Recently, the stock market continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote on February 7, “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.” Despite Friday's rally and Monday’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.
This morning, the S&P 500 futures contract is gaining 0.5%, so the S&P 500 index is likely to open higher. However, there will be a lot of volatility following Jerome Powell's Testimony, scheduled just half an hour after the opening of the session.
Last week, the investor sentiment has improved again; the Wednesday’s AAII Investor Sentiment Survey showed that 46.5% of individual investors are bullish, while only 21.3% 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 continues to trade above its over month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 Remains Relatively Weaker
On Friday, the technology-focused Nasdaq 100 index reached a new record high of 18,333.26. However, on Monday, it lost 0.4%, and yesterday, it sold off by 1.80%. It came back below the 18,000 level, driven by nearly 3% sell-offs in Apple and Microsoft stocks. Yesterday, the Nasdaq 100 was the lowest since February 22, clearly exemplifying the old Wall Street adage: 'Bulls take the stairs, bears take the elevator'.
VIX Sharply Bouncing
The VIX index, also known as the fear gauge, is derived from option prices. Stock prices rallied on Friday, leading the VIX lower as it approached the 13 level. It went closer to its previous lows, indicating a growing complacency in the market. However, yesterday, the VIX moved sharply higher, briefly breaking above the 15 level.
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 Is Above 5,100 Again
Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it broke below the 5,100 level, reaching a daily low at around 5,063. This morning, the market is getting back above the 5,100 level. For now, it looks like a short-term consolidation following recent advances.
Conclusion
The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index breaking above 5,100, and the Nasdaq 100 index reaching above the 18,000 mark. In my February 13 analysis, I noted that, “in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.”. Indeed, the correction occurred pretty fast, with the inflation number contributing to the downturn. However, the market quickly retraced the decline in the following days, and then rallied, led by Nvidia stock after its earnings release. However, yesterday, the bullish outlook became somewhat unclear.
Today, the S&P 500 is likely to open higher, retracing a part of its yesterday’s decline. Yesterday, I wrote that “The most likely scenario is an extended consolidation at some point, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.” This prediction turned out to be accurate, as the index quickly retraced recent gains. However, there may be further uncertainty and volatility ahead.
On Friday, I noted in my Stock Price Forecast for March, “So far, stock prices have been trending upwards in the medium to long term, reaching new record highs. The prudent advice one could give right now is to remain bullish or stay on the sidelines if one believes stocks are becoming overvalued and may need a correction. It's likely that the S&P 500 will continue its bull run this month. However, we may encounter a correction or increased volatility at some point as investors start to take profits off the table.”
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is likely to extend a consolidation along the 5,100 level.
- Markets are awaiting the important Fed Chair Powell’s Testimony.
- In my opinion, the short-term outlook is neutral.
The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.
And if you’re not yet on our free mailing list, I strongly encourage you to join it - you’ll stay up-to-date with our free analyses that will still put you ahead of 99% of investors that don’t have access to this information. Join our free stock newsletter today.
Thank you.
Paul Rejczak,
Stock Trading Strategist