Stocks rallied by almost 5% in May: Will June bring more record-breaking advances?
Stock prices were quite volatile on Monday, but the trading session ended just 0.11% higher for the S&P 500 index. The market extended its Friday rebound, briefly breaking the 5,300 level. Was it just a correction of a new uptrend? Today, the S&P 500 index is likely to open 0.3% lower, as indicated by futures contracts, and that will bring more short-term uncertainty to the market.
On Friday, stock prices bounced from their new local low, and the index got back above the crucial 5,250 level. Yesterday, I noted that “the market may see more uncertainty ahead of a series of economic data this week. The most likely scenario is more consolidation and sideways trading.”
What will the month of June be like for the stock market? For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.
However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. 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.
Investor sentiment worsened, as indicated by the AAII Investor Sentiment Survey last Wednesday, which showed that 39.0% of individual investors are bullish (a decrease from last week's reading of 47.0%), while 26.7% of them are bearish. 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 reached the 5,300 level yesterday, as we can see on the daily chart.
S&P 500 Gained 4.80% Last Month
In May, the S&P 500 index gained 4.80%, extending a medium-term consolidation. In March, the index gained 3.1%, but in April, it lost 4.2%. The last three months have looked like a roller-coaster type of price action.
In my Stock Price Forecast for May, I noted that “Now, it's evident that the market is undergoing a correction of its multi-month rally since November. While this short-term downtrend may extend, it appears to be a correction rather than the start of a new medium-term downtrend.”
So far, this appears to be true, as the market as a whole remains relatively close to new record highs and continues moving sideways.
Nasdaq 100 – Clear Short-Term Upward Reversal
Quoting from Yesterday, “On May 23, the technology-focused Nasdaq 100 index reached a new record high of 18,907.54, and last Friday, it was as low as 18,189.78, which means a 3.8% downward correction in a little more than a week. Was it enough to spur another record-breaking rally? It’s hard to say – the market may see more uncertainty this week.”
Today, the Nasdaq 100 is expected to open 0.2% lower, extending a consolidation above the important 18,400 level.
VIX Remained Close to 13
The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 - the highest since late October, signaling fear in the market. Recently, it was declining again, and on May 23, it reached its lowest point since November 2019 at 11.52. On Thursday, Friday, and yesterday, it has been bouncing up to 14.30-14.80, showing some fear despite the advances 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.
FANG Stocks Correcting
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 May 29, the FANGs hit a new record high of 10,662.21, driven mainly by a record-breaking rally in NVDA stock and a rebound in AAPL stock. However, at the end of May, investors really adhered to the 'sell in May and go away' proverb, selling off FANG stocks. On Friday, the ETF reached its previous local highs around the 10,200 level, before rebounding yesterday. This indicates that more uncertainty for that important sector may be coming in the near future.
Futures Contract - Below 5,300
Let’s take a look at the hourly chart of the S&P 500 futures contract. On the previous Thursday, it pulled back from a new record high of around 5,368 and fell by almost 100 points, before rebounding up to around 5,340. Since then, it has been consistently declining, reaching a low of around 5,206 on Friday. However, it rebounded above 5,300 again. This morning, the market is trading below that level. The short-term support remains at 5,250, and the resistance is at 5,300-5,320.
Conclusion
Today, stock prices are expected to open 0.4% lower, retracing some of their yesterday’s rebound from intraday lows below the 5,250 level. The market may see more short-term uncertainty, but a deeper correction now seems less likely.
Summing up the Stock Price Forecast for June 2024, the market has been trading within a consolidation of the uptrend for the last three months. The S&P 500 index continues to trade relatively close to new record highs as investors are pricing in the Fed’s monetary policy easing later this year. Hence, a medium-term downward reversal still seems a less likely scenario.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is likely to extend a consolidation following its Friday rebound.
- On Friday, stock prices were the lowest since early May, indicating a correction of the recent advances.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist