Stocks at New Records: Have They Gone Too Far?

Paul-Rejczak Paul Rejczak 11 h 43 min ago

Will stock prices extend their advances despite short-term overbought conditions?

Stock prices continued to rally on Monday, with the S&P 500 index reaching a new record high of 5,871.41, and the Nasdaq 100 breaking above its previous highs. The key question now is: is this euphoria a precursor to a sharp downward reversal, or is the market poised to rise much higher despite short-term overbought conditions? So far, there have been no confirmed negative signals. This morning, the S&P 500 is likely to open flat following earnings releases from major companies like BAC, GS, and UNH. Investors will be anticipating more reports, including ASML tomorrow and TSMC and NFLX on Thursday.

Investor sentiment improved last week, as shown by Wednesday’s AAII Investor Sentiment Survey, which reported that 49.0% of individual investors are bullish, while only 20.6% of them are bearish, down from 27.3% last week.

The S&P 500 accelerated its uptrend after breaking above its September highs, as we can see on the daily chart.

Stocks at New Records: Have They Gone Too Far? - Image 1

Nasdaq 100: Higher, Yet Still Below its Record High

The Nasdaq 100 gained 0.82% yesterday, breaking above its September high and nearly reaching the 20,500 level. This morning, it is expected to open 0.1% lower. Tech stocks may experience a period of uncertainty as investors await quarterly earnings and future outlooks.

Stocks at New Records: Have They Gone Too Far? - Image 2

VIX Finally Below 20

On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. On September 26, it fell to 14.90 as stock prices were advancing toward new record highs. While the VIX had remained above 20 recently, yesterday's record-breaking rally in the S&P 500 pushed it below that level, signaling reduced 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.

Stocks at New Records: Have They Gone Too Far? - Image 3

 

S&P 500 Futures Contract: Above 5,900

Let’s take a look at the hourly chart of the S&P 500 futures contract. It reached new record highs, breaching the 5,900. Level. The market remains in an uptrend, with gains accelerating after breaking above the 5,820 level last Wednesday. Support is now at 5,850–5,870, among others.

Stocks at New Records: Have They Gone Too Far? - Image 5

 

Conclusion

Stock prices are expected to fluctuate following yesterday’s record-breaking rally, with the S&P 500 reaching a new high above 5,870.

Investor sentiment remains elevated, as reflected in last week's AAII survey, with only 20% of individual investors expressing bearish views. There are no clear negative signals at present, but the market may fluctuate following its rally. This morning, the S&P 500 is expected to open virtually flat.

In my Stock Price Forecast for October 2024, I wrote “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 is neutral.

Here’s the breakdown:

  • The S&P 500 is likely to open flat, with investors awaiting further earnings releases.
  • Despite some clear technical overbought conditions, the market continues to rise.
  • In my opinion, the short-term outlook is neutral.

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Thank you.

Paul Rejczak,
Stock Trading Strategist