Stocks have entered a correction in July, but is it just a correction?
My speculative short position in S&P 500 futures contract, opened on July 9 at 5,636 was closed at a stop-loss (stop-profit) level of 5,551 on Wednesday. Overall, I gained 85 points, or 1.5% of the contract value.
Let’s start with a short-term picture. The stock market reversed its short-term advance yesterday, with the S&P 500 index reaching a local high of 5,566.16 before closing 1.37% lower, after rebounding from a daily low of 5,410.42. Stock prices declined due to earnings uncertainty, a market rout in Japan, among other factors. This morning, the market is likely to open 1.7% lower after a lower-than-expected Nonfarm Payrolls release. In the short term, the likely scenario is more volatility after reaching new lows of the downtrend.
Investor sentiment improved slightly this week, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that 44.9% of individual investors are bullish, while only 25.2% of them are bearish – down from 31.7% last week.
The S&P 500 index kept going sideways after breaking its upward trend line, as we can see on the daily chart.
Is the S&P 500 Going to Retrace Much More of Its Advances?
In July, the S&P 500 index gained 1.13% after reaching a new record high of 5,669.67 on July 16. However, the month wasn’t clearly bullish, as the closing price fell almost 150 points below the high. Recent declines raise the question: Is the market poised for a bigger downtrend or perhaps even a bear market? For now, it still appears to be a correction within an uptrend. However, stocks are likely to experience more losses, potentially bottoming out in October, as seasonality suggests. The S&P 500 remains above its long-term upward trend line from its 2020 low.
Nasdaq 100: A Roller-Coaster
The technology-focused Nasdaq 100 gained 3.0% on Wednesday but lost 2.44% yesterday, retracing most of its rebound. On Wednesday, the index was led higher by big-tech stocks, but those same stocks led it lower on Thursday. This morning, it is expected to open 2.5% lower following earnings releases from AAPL, AMZN, and INTC, which were generally met with selling.
VIX Reached New High
The VIX index, a measure of market fear, has been hovering around the 12-13 level since May. Earlier this week, it pulled back to around 16.0-16.5, and yesterday, it reached a new local high of 19.48, indicating a growing 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.
FANG Stocks: Correction or a Long-Term Reversal?
The NYSE FANG+ (NYFANG) index, which includes 10 highly-traded tech mega-cap stocks like Apple, Microsoft, Amazon, Alphabet, Nvidia, and Tesla, hit a new record high of 12,280.92 on July 11. Since then, it has been declining, reaching a local low of 10,643.67 on July 25.
In my Stock Price Forecast for July, I noted that “it seems that some more pronounced correction may be in the cards.” and this has proven to be accurate. For now, it appears to be a downward correction rather than a long-term reversal.
Futures Contract: New Low Following Yesterday’s Rout
Let’s take a look at the hourly chart of the S&P 500 futures contract. It reversed sharply lower yesterday after reaching a local high of around 5,601. The market sold off by almost 200 points, and this morning it is trading below 5,400. This kind of move suggests that more volatility is likely ahead.
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.”
This outlook proved correct, but the scale of yesterday’s reversal was surprising. Yesterday, I wrote “Profit-taking is likely at some point, given ongoing concerns about company valuations and geopolitical risks.” And once again, this as accurate.
This morning, the S&P 500 is likely to open 1.7% lower, accelerating its downtrend. However, a short-term bottom may be near, and more volatility is likely ahead.
Summing up the Stock Price Forecast for August 2024, the market extended its uptrend in July, reaching a new record high on July 16. Investors continued to price in the Fed’s expected monetary policy easing. However, a sharp reversal occurred, and by the end of the month, the S&P 500 experienced significant volatility following the sell-off. August is beginning on a very bearish note, but the market may find a local bottom at some point.
My speculative short position in S&P 500 futures contract, opened on July 9 at 5,636 was closed at a stop-loss (stop-profit) level of 5,551 on Wednesday, gaining 85 points or 1.5% of the contract value.
My short-term outlook is now neutral.
Here’s the breakdown:
- The S&P 500 index reversed lower yesterday, and this morning, another wave of selling is coming.
- It still looks like a sharp downward correction, not a new bear market.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist