Stock prices fluctuate - is this just a pause before another leg down?
Monday’s trading session didn’t change much for the stock market, with the S&P 500 index remaining below the 5,500 level and closing 0.08% higher. This morning, the index is likely to open 0.2% higher as indicated by futures contract.
Last Friday, I noted “Is the market forming a bottom pattern? It might be, but given the clear downtrend, the recent fluctuations are likely just a consolidation before another leg lower. We’re awaiting crucial earnings data next week and the important FOMC Rate Decision on Wednesday.”
This week, the key quarterly earnings releases will be: AMD and MSFT today, META tomorrow, and AMZN and AAPL on Thursday. They will likely influence market sentiment. Of course, the important FOMC release tomorrow will likely be met with volatility too.
My speculative short position in S&P 500, opened on July 9 remains profitable.
Recently, investor sentiment has worsened, as indicated by last Wednesday’s AAII Investor Sentiment Survey, which showed that 43.2% of individual investors are bullish, while 31.7% of them are bearish – up from 23.4% last week.
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 continued to trade below 5,500 yesterday, as we can see on the daily chart.
Nasdaq 100 Remains Close to 19,000
The technology-focused Nasdaq 100 index retraced its Thursday decline on Friday, and yesterday, it went sideways, closing 0.19% higher.
Last week, it led the market lower after earnings releases from GOOG and TSLA. This week, we will see key big-tech releases; they will likely lead to volatility and rebound attempts. Today, the Nasdaq 100 is likely to open 0.4% higher, and after the session closes, the earnings from AMD and MSFT will be released.
VIX Pulled Back Below 17
The VIX index, a measure of market fear, has been hovering around the 12-13 level since May. On Thursday, it was as high as 19.36 following its recent advances, fueled by the decline in stock prices. Yesterday, it pulled back to a local low of 16.23, indicating 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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
Futures Contract Consolidating Along 5,500
Let’s take a look at the hourly chart of the S&P 500 futures contract. The market is still experiencing volatility following its recent decline. Last Thursday, it traded as low as 5,430, and on Friday, it was closer to 5,530 again. This morning, the contract is trading slightly above 5,500. The resistance level is at 5,550, and the support remains at 5,480-5,500, among others.
Conclusion
Last Friday, I wrote: “This week’s sell-off raises questions: Was it just a correction? Or was it the beginning of a downtrend? Seasonal patterns suggest that the low is likely to happen in October, but the future does not always follow the past. For now, it looks like a downtrend, and in the short term, an upward correction may occur.”
The earnings season is in full swing, and tomorrow, we will get the FOMC release. The releases will likely lead to volatility, and maybe buying pressure for stocks. This morning, the sentiment is slightly bullish ahead of economic data, including Consumer Confidence and JOLTS number, to be released at 10:00 a.m.
My speculative short position in the S&P 500 futures contract, opened on July, remains profitable.
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index is experiencing volatility since Wednesday-Thursday.
- Investors are waiting for key quarterly earnings releases from big-techs this week, and the Fed release tomorrow, among others.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist