The S&P 500 broke lower yesterday. What’s Ahead in September?
My speculative short position in the S&P 500 futures contract from August 20, opened at the 5,626 level, is now in profit.
Let’s start with a short-term picture. Stock prices fell yesterday, with the S&P 500 index breaking below its recent trading range and closing 2.12% lower. The market retraced some of its early August advance after rebounding from levels close to the July 16 record high of 5,669.67. The sharp move lower may signal the start of a new short-term downtrend, but for now, it looks like a downward correction. This morning, the index is likely to open 0.3% lower, as indicated by futures contracts.
On August 21, I wrote “Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”
Investor sentiment remained elevated last week, as shown by the AAII Investor Sentiment Survey from Wednesday, which revealed that 51.2% of individual investors are bullish, while 27.0% of them are bearish.
The S&P 500 index approached the 5,500 level yesterday, as we can see on the daily chart.
Is the S&P 500 Headed for a Medium-Term Correction?
In August, the S&P 500 index gained 2.28%, but the price action over the last thirty-one days could be well described as a roller-coaster ride. In early August, the S&P 500 sold off due to the Yen turmoil, reaching a local low of 5,119.26 on August 5. Since then, stock prices have been rising, up to a local high of 5,651.37 last Friday. Consequently, the market closed the previous month near its highest point and close to the record high from July.
Judging the market before yesterday’s sell-off would have been quite bullish, as a re-test of the record high seemed very possible. However, a breakdown below the recent trading range looks like a game-changer; it seems the market will remain volatile after its early August sell-off. The medium-term picture looks more bearish, but the most likely scenario is a consolidation above the 5,000 level. September is likely to bring a correction, with a local low potentially approached in October, as usual market seasonality suggests.
Nasdaq 100 Sold Off by Over 3%
The technology-focused Nasdaq 100 remained relatively weaker than the broader stock market yesterday, as it lost 3.15%, breaking below the 19,000 level. This was mainly led by a significant decline in NVDA stock, driven by news about an antitrust investigation and continued profit-taking after last Wednesday’s earnings release.
The resistance level for the Nasdaq 100 is now at 19,200, marked by some previous lows. Today, the Nasdaq 100 is likely to open 0.6% lower, further extending its decline.
VIX: Sharply Advancing
On August 5, the VIX index, a measure of market fear, reached a new long-term high of 65.73 - the highest level since the 2008 financial crisis and the COVID sell-off in 2020. On August 19, it traded as low as 14.46 following a rebound in stock prices. Yesterday, though, it advanced, breaking the 20 level and reaching a local high of 21.99, indicating increased 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 Mirrored Nasdaq Reversal
The NYSE FANG+ (NYFANG) index, which includes 10 highly-traded tech mega-cap stocks like Apple, Microsoft, Amazon, Alphabet, Nvidia, and Tesla, reversed from its local high on August 20, and yesterday, it dipped by 3.45%. If the Nasdaq 100 is relatively weaker than the S&P 500, the FANG stocks visibly seem to lead it lower.
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.
Futures Contract: Consolidating Above 5,500
Let’s take a look at the hourly chart of the S&P 500 futures contract. Last week, it was extending a consolidation above the 5,600 level. Yesterday, I mentioned “It still appears to be in a short-term consolidation, likely forming a topping pattern.” This proved accurate as the market broke lower, effectively ending a consolidation.
This morning, the S&P 500 contract is trading sideways, which looks like a flat correction of the decline. The resistance level is now at 5,560, marked by the previous local low, and the support level is at 5,480-5,500.
Conclusion
The S&P 500 sharply sold off on tech stock valuation worries, among other factors. It pulled back after fluctuating near its July record high. The market failed to continue the long-term uptrend, and yesterday, sellers took advantage, leading to a more than 2% dip. This morning, the index is likely to extend the decline, but the question is whether it will break the 5,500 level. Investors will be waiting for the important JOLTS Job Openings release at 10:00 a.m.
I am maintaining a speculative short position in the S&P 500 futures contract from August 20, opened at the 5,626 level.
Summing up the Stock Price Forecast for September 2024, the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. Yesterday’s sharp reversal suggests more volatility in September. Last month, I wrote that “August is beginning on a very bearish note, but the market may find a local bottom at some point.” The same could be said today, and September will likely not be entirely bearish for stocks.
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index broke below its recent trading range yesterday.
- The market is likely to extend the declines, however, it’s likely to enter a medium-term consolidation.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist