What will the stock market do in October? Is it approaching a downward correction?
The last trading day of the month and quarter brought an advance for the S&P 500 index, which closed 0.42% higher after an intraday dip toward the 5,700 level. Sentiment improved by the end of the day, and the index approached its record high from last week of 5,767.37. Today, the S&P 500 is likely to open 0.1% lower. It may see some more short-term uncertainty and a sideways trading action.
Investor sentiment remains elevated, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 49.6% of individual investors are bullish, while only 23.7% of them are bearish, down from 26.4% last week.
The S&P 500 is currently trading within a short-term consolidation, as we can see on the daily chart.
S&P 500: Another Monthly Advance
In September, the S&P 500 gained 2.02%, continuing its record-breaking rise, mainly driven by news of Fed monetary easing. In August, the index rose by 2.3%, rebounding from the August 5 low of 5,119.26, which was triggered by turmoil in the Japanese yen. Since then, stock prices have been climbing, reaching a new record high last Thursday.
The market remains in a medium-term uptrend. However, a downward correction could still occur. So far, no confirmed negative signals have appeared, although some overbought conditions are evident.
Nasdaq 100 Stays Near 20,000
The Nasdaq 100 gained 0.26% yesterday after rebounding from a local low around 19,850. It climbed back above the 20,000 level, continuing its short-term consolidation. Resistance remains at around 20,250. Futures indicate the index will likely open flat this morning.
VIX: Near the 17 Level
On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. However, a stock rebound followed by a record-breaking rally pushed the VIX lower. Last Thursday, it fell to 14.90, its lowest level since late August. However, on Friday, the VIX had rebounded to around 17, following a pullback in stocks, and remained elevated yesterday.
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: Consolidation Along Previous High
The NYSE FANG+ (NYFANG) index, which includes 10 highly-traded tech mega-cap stocks like Apple, Microsoft, Amazon, Alphabet, Nvidia, and Tesla , remains slightly weaker than the Nasdaq 100, staying near its local high from August.
Last month, I wrote “Is this just a downward correction of the recent rally following a “V” reversal off the bottom from early August? For now, it still looks like a sharp correction, but overall, the medium-term picture looks bearish.”
It still appears to be a consolidation and just a rebound following the early August sell-off.
S&P 500 Futures Contract: Consolidation Around 5,800
Let’s take a look at the hourly chart of the S&P 500 futures contract. It continues to trade near the 5,800 level, close to last week’s record high. Resistance is around 5,830, with support between 5,780 and 5,800.
Conclusion
The S&P 500 rebounded from its local low yesterday, bringing back hope for the bulls. The market could retest last week’s record high. The key question is whether the uptrend will continue despite overbought conditions. While no clear negative signals have appeared, the rally seems overstretched.
On September 18, I noted about the coming FOMC release “A "buy the rumor, sell the news" scenario seems likely, but a bullish breakout to new highs can't be ruled out either.” The previous Thursday’s rally invalidated a quick reversal scenario, but the market could still be forming a top before a more significant correction.
I opened a speculative short position in the S&P 500 futures contract on September 16.
Summing up the Stock Price Forecast for October 2024, the market extended its uptrend in September after rebounding from the early August low. No clear negative signals have surfaced; however, a correction could still occur. Historically, October is a seasonally weak month, especially during its first weeks. Will the stock market sell off soon? Although monetary policy easing supports the bulls, uncertainty surrounding geopolitical risks and the upcoming presidential election may still weaken sentiment.
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 remains near its recent record high.
- The market may still be forming a topping pattern before a downward correction.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist