S&P 500 may have reached a local high. Is it justified to open a short position?
The stock market reached yet another new record high on Monday, with the S&P 500 index hitting 5,583.11 and closing just 0.1% higher. Is it getting closer to a correction? Today, we’ll get a testimony from Fed Chair Powell at 10:00 a.m., which may lead to some volatility.
The S&P 500 is likely to open 0.1% higher this morning, as indicated by futures contracts. Investors are waiting for Powell's testimony today and tomorrow, and the Consumer Price Index release on Thursday.
As I mentioned in my stock price forecast for 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.”
Investor sentiment slightly decreased last week, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 41.7% of individual investors are bullish, while 26.1% 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 index broke above its two-week-long trading range last Wednesday, as we can see on the daily chart.
Nasdaq 100: Slightly Higher
Yesterday, the technology-focused Nasdaq 100 index reached a new record high of 20,455.38, which was around 50 points above its high from Friday. It closed 0.23% higher on a slightly thinner market as AAPL and META stocks reached new record highs. This morning, the Nasdaq 100 is expected to open 0.2% higher. There are short-term overbought conditions, and the market is likely to top at some point.
VIX Is Still Close to 12
The VIX index, also known as the fear gauge, is derived from option prices. Recently, it has been hovering around the 12 level, which historically is relatively low, indicating low 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.
Futures Contract Remains Above 5,600
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading sideways, yet still close to new record highs. The support level remains at around 5,600, marked by recent highs.
Conclusion
The S&P 500 index is likely to open slightly higher today, and all eyes will be on Fed Chair Powell’s testimony at 10:00 a.m. Although he is not likely to add much new to the overall policy picture, it may mark a ‘sell the news’ event. Additionally, we will get the CPI release on Thursday, and the earnings season begins with big banks reporting on Friday. There are more and more indicators pointing to a correction or downward reversal at this moment. The risk of a downward correction is increasing.
Quoting my last Monday’s stock price forecast for July, “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 is bearish.
Here’s the breakdown:
- The S&P 500 reached yet another new record high on Monday; this morning, it is all about the Powell’s testimony.
- Investors are waiting for important data this week and the coming quarterly earnings season.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist