Stocks reached new records in June: Will July bring a downward correction?
The main stock market indices reached new record highs on Friday, but the session closed lower following some end-of-month, quarter, and half-year profit-taking. The S&P 500 index closed 0.41% lower after reaching a new all-time high of 5,523.64. However, it remained within an over week-long trading range along the 5,450 level.
This morning, the S&P 500 is likely to open 0.2% higher, as indicated by futures contracts. It is poised to further extend a short-term consolidation as markets await more economic data, including the ISM Manufacturing PMI release at 10:00 a.m.
A month ago, in my stock price forecast for June, I wrote “As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future. (…) I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”
With the index gaining almost 3.5% last month, my forecast proved accurate. But what will the S&P 500 do in 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.
Last week, the investor sentiment remained basically unchanged, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 44.5% of individual investors are bullish, while 28.3% of them are bearish (up from last week's reading of 22.5%). 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 continued sideways after breaking its upward trend line last week, as we can see on the daily chart.
S&P 500 Didn’t Do Much Last Week
Compared to the previous Friday’s closing price, the index lost 0.08%, fluctuating after its recent record-breaking advances. The last two weeks’ price action is cautionary, as the market may be forming a high here, with resistance at 5,500.
Quoting an article from May 13: “The recent price action confirmed the importance of the 5,000 level as a medium-term support. It’s hard to say whether the market will continue its long-term uptrend; however, it will most likely remain above 5,000 in the coming weeks or months.”
S&P 500 Extended Gains on a Monthly Time-Frame
In June, the S&P 500 index gained 3.47%, breaking above its consolidation from March. In March, the index gained 3.1%. In April, it lost 4.2%, and in May, it gained back 4.8%. So, June has been bullish for stocks, and a record-breaking rally pushed the index slightly above the 5,500 level. The index remains above its short-term and medium-term upward trend lines and above the previous high from January of 2022.
Nasdaq 100: New Record Above 20,000 and a Retreat
On Friday, the technology-focused Nasdaq 100 index reached a new record high of 20,017.71, before retracing the advance and closing 0.54% lower. It basically extended a consolidation following the first half of June rally. This morning, the Nasdaq 100 is expected to open 0.3% higher, retracing some of its Friday’s loss.
VIX Remains Relatively Low
The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Since the previous Thursday, it has been closing above the 13 level, showing increasing fear in the market, but on Friday, it dipped to a local low of 11.87. It closed above the 12 level again, though.
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 Retreated from New Record Highs
The NYSE FANG+ (NYFANG) index offers exposure to 10 highly-traded tech mega-cap stocks, including Apple, Microsoft, Amazon, Alphabet, Nvidia, and Tesla. Let’s examine the daily chart of this index.
On Friday, the FANGs hit a new record high of 11,544.77, but the session closed almost 1% lower and below the previous high from June 17. More uncertainty for that important sector may be coming in the near future as we are approaching quarterly earnings. There have been no confirmed negative signals, but it seems that some more pronounced correction may be in the cards.
Futures Contract: Going Sideways
Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it reached close to the previous high of around 5,588, before pulling back to the recent local lows and a support level of around 5,500-5,520. This morning, the market is trading within its last week’s consolidation, with the resistance level at 5,540.
Conclusion
The S&P 500 index is poised to open 0.2% higher today, retracing some of its Friday’s intraday retreat. Despite reaching a new record high on Friday, the recent trading action is best described as a flat correction of the uptrend. Investors are waiting for more economic data and quarterly earnings later in the month. The risk of a downward correction is increasing; however, it still looks like a flat correction of the uptrend.
Summing up the Stock Price Forecast for July 2024, the market has extended its uptrend in June, reaching a new record high on the last trading day of the month. Investors continue pricing in the Fed’s monetary policy easing that is supposed to happen this year. Hence, a medium-term downward reversal still seems a less likely scenario. However, the recent record-breaking rally may be a cause for some short-term concern as a downward correction may be coming.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 reached a new record high on Friday, before reversing lower and extending a consolidation.
- Investors are waiting for more economic data and the coming quarterly earnings season.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist