Stocks are set to rally at the open, but this could indicate that further consolidation is likely.
The stock market rebounded on Friday, with the S&P 500 closing 1.26% higher after breaking above the 5,900 level. This advance was fueled by positive economic data and a rally in select tech stocks. Today, the S&P 500 is expected to open 0.8% higher following an overnight advance on news about Trump’s tariffs.
On December 9, I noted that “the S&P 500 index reached a new record high of 6,099.97 on Friday. The key question remains whether the uptrend will continue, despite signs of short-term overbought conditions.” The sharp decline following the Fed’s release confirmed that the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment has worsened, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 35.4% of individual investors are bullish, while 34.2% of them are bearish.
The S&P 500 index rebounded from the 5,850 level again, as we can see on the daily chart.
S&P 500 Extends Consolidation
The S&P 500 lost 0.48% last week after gaining 1.1% in the prior week. It has continued to fluctuate following the mid-December pullback.
The key medium-term support level remains around 5,700, marked by previous lows.
S&P 500 Pulled Back in December
In December, the S&P 500 declined by 2.5%, retracing nearly half of its 5.7% rally in November. Despite this pullback, it reached a new record high last month, extending its multi-year bull market.
Is the market forming a medium-term high before a more significant downward correction? It’s too early to tell, but the current volatility suggests the market is entering a correction or at least a medium-term consolidation.
Nasdaq 100 Extends Gains Above 21,000
The Nasdaq 100 index gained 1.67% on Friday and is set to open 1.0% higher this morning, fueled by NVDA stock rally, among others. Last Thursday, the Nasdaq 100 hit its lowest level since late November before rebounding from 20,800.
Further fluctuations are likely following November - December rally.
VIX Moving Lower Again
On December 18, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. It confirmed heightened fear in the market as stocks sold off. Then, the VIX dropped below 15 in late December. Last week, it retreated from 20 again, confirming an upward reversal in stock prices.
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 Consolidating: What’s Next?
The NYSE FANG+ (NYFANG) index, which includes 10 highly-traded tech mega-cap stocks like Apple, Microsoft, Amazon, Alphabet, Nvidia, and Tesla, remains in a sideways trend after hitting a record high on November 13. This appears to be a flat correction within the long-term uptrend. Support is at 13,000, marked by the recent lows. A break below this level could signal a medium-term downward reversal.
S&P 500 Futures Contract Rallies Above 6,000 Again
This morning, the S&P 500 futures contract is extending its Friday’s advance, breaking above the 6,000 level. Key support is now at 5,980-6,000, with resistance is at 6,050-6,100. The market seems poised for further consolidation.
Conclusion
Today’s trading session is expected to open on a positive note, with the S&P 500 extending Friday’s gains. However, investors are bracing for a series of economic data releases scheduled for this week, which could lead to further consolidation and volatility.
Summing up the Stock Price Forecast for January 2025, the stock market is poised for continued fluctuations following the post-election rally in November. Although the S&P 500 dipped by 2.5% last month, this appears to be just a correction of November’s gains.
Will the market resume its uptrend and reach new record highs? This appears likely at some point, driven by growing optimism ahead of Trump’s upcoming inauguration on January 20. However, rallies may provide selling opportunities, leading to a medium-term consolidation phase.
Last month, I wrote “While December is historically a bullish month, increased volatility and a short-term correction remain likely. The technology sector continues to underperform relative to the broader market.”
As expected, stocks pulled back in December, with the technology sector contributing to the market’s weakness.
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to retrace more of its recent declines.
- The stock market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist