The sentiment worsens this morning, but does it mean that stocks are forming a topping pattern?
The stock market remained relatively flat following a long holiday weekend, with the S&P 500 index dropping 0.20% yesterday. On Friday, it reached a new record high of 5,264.85, before closing virtually flat.
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 much improved last week; the Wednesday’s AAII Investor Sentiment Survey showed that 50.0% of individual investors are bullish, while only 22.4% of them are bearish, down from 27.2% last week. 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.
This morning, the S&P 500 is likely to open 0.7% lower, following an overnight decline of the futures market. Consequently, there will likely be more uncertainty in the market, especially after rebounding from last week’s record high to near the 5,200 level again.
The S&P 500 index continues to trade above its two-month-long upward trend line, as we can see on the daily chart.
S&P 500 - Another Monthly Gain
Compared to the previous month’s closing price, the index gained 3.10%, extending its advance after breaking above the previous high from January of 2022. Stock prices are currently at their highest in history, with the uptrend clearly evident. However, there is a possibility that the market may enter a correction or consolidation phase at some point.
Nasdaq 100 – Short-Term Consolidation
On Thursday, March 21, the technology-focused Nasdaq 100 index reached a new record high of 18,464.70, extending its long-term uptrend. However, last week, it retraced slightly below the 18,200 level before trading sideways within a relatively narrow price range. While this price action may resemble a topping pattern, no confirmed negative signals have emerged thus far.
VIX – Rebounding From 13
The VIX index, also known as the fear gauge, is derived from option prices. Last week, it has been trading along the 13 level, and yesterday, it bounced to 14 level as stocks were retracing their Thursday’s-Friday’s advances. However, the VIX is still trading below the important 14.50-15.50 area.
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.
FANG Stocks Going Sideways
The NYSE FANG+ (NYFANG) index offers exposure to 10 highly-traded tech megacap stocks, including Apple, Microsoft, Amazon, Alphabet, Nvidia, and Tesla. Let’s examine the daily chart of this index.
It clearly shows, that the uptrend was exhausted in the end of February, and since then, it has traded sideways, fluctuating between the support level of 9,700 and the resistance level of 10,200.
With the second half of April marking the beginning of earnings season, it will be interesting to observe how tech stocks perform and whether they could potentially resume their long-term uptrend or signal a correction in the broader market.
Futures Contract Retracing More of the Advances
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning it’s trading below the 5,300 level after breaking the upward trend line. The market approached last week’s local lows and the support level of around 5,260.
Conclusion
Today, the S&P 500 index is likely to open 0.7% lower, retracing some of its last week’s advances. More pronounced profit-taking action may be in cards at some point. However, as of now, there have been no confirmed negative signals.
Last month, in my Stock Price Forecast for March, I noted “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.” This remains very true after a 3% monthly gain in the S&P 500 index. 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.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is likely to open lower, correcting more of its last week’s advances.
- In the medium term, stock prices are overbought, suggesting the potential for a correction.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist