The S&P 500 accelerated its uptrend on Friday, but is there any gas left?
Friday’s trading session was very bullish, with the main stock market indexes setting their new record highs ahead of the upcoming quarterly earnings releases and the expected monetary policy easing by the Fed this year. The S&P 500 index gained 1.23% after breaking above its January 4, 2022, all-time high of 4,818.62. The daily high was at 4,842.07, marking a new record high.
Stock prices broke above their month-long trading range, invalidating any potential medium-term topping pattern scenarios. However, in the short term, one would expect some downward correction as the market becomes increasingly overbought. The market rallied from its Wednesday’s daily low of around 4,715 - an uninterrupted advance of almost 130 points. Of course, it's hard to tell if this marks the peak of a rally, but caution may be advised, as a sharp correction could occur at some point.
Surprisingly, investor sentiment has slightly worsened last week; Wednesday’s AAII Investor Sentiment Survey showed that 40.4% of individual investors are bullish, significantly lower than the week ago. 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.
This morning, the S&P 500 futures contract indicates yet another positive open for the S&P 500 index, gaining 0.3%. Investors will wait for the important earnings reports this week. Tomorrow the market will receive reports from GE, MMM, NFLX, VZ, among others, and on Wednesday, a highly anticipated release from TSLA.
The market may see another record high today, as we can see on the daily chart.
Nasdaq Rallies on Tech Mega-caps Strength
The technology-focused Nasdaq 100 index reached a new all-time high on Friday at the level of 17,317.21, gaining almost 2%. This morning it is poised to further extend its advance by 0.6%.
Recently, it bounced sharply, followed by another advances. Last Wednesday, the Nasdaq 100 closed above the last Tuesday’s daily gap down of 16,687-16,758, which was a positive signal. While today’s advance is expected, a correction may occur at some point as the market is currently technically overbought in the short term.
VIX Remains Within a Consolidation
The VIX index, also known as the fear gauge, is derived from option prices. On Thursday, it came back below the 14.50 level, marked by the previous local highs, and on Friday, it extended the decline following rallying 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.
Futures Contract Gets Closer to 4,900
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it keeps extending the uptrend, approaching the 4,900 level. There have been no confirmed negative signals so far; however, the market is becoming increasingly overbought in the short-term. The support level is now at 4,840, marked by the recent local highs.
Conclusion
The S&P 500 index is likely to continue its uptrend this morning, following an overnight futures contract’s advance and global stock markets’ bullishness. Investor sentiment remains elevated ahead of upcoming quarterly corporate earnings releases.
On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, Friday’s price action left no illusions of a potential medium-term trend reversal. The market is overbought in the short-term, but guessing a correction is very challenging right now.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 reached new record high on Friday, and this morning it may see more fireworks.
- Breakout above the recent highs marked a positive signal; however, it’s uncertain whether the market won’t retrace some of the rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist