Will stocks extend their declines, or was yesterday's low the final bottom?
Yesterday, stocks accelerated their Friday sell-off, driven by turmoil in the Yen and a crash in the Japanese Nikkei index. However, the main indices rebounded from their intraday lows, reducing their initial declines. Overall, the S&P 500 index closed 3.00% lower. This morning, volatility remains elevated following a 10% rebound in the Nikkei index, with the S&P 500 likely to open 0.6% higher.
Before the current turmoil, investor sentiment had slightly improved last week, as indicated by Wednesday's AAII Investor Sentiment Survey, which showed that 44.9% of individual investors are bullish, while only 25.2% of them are bearish – down from 31.7% last week.
The S&P 500 index retraced most of its gains from the April low, as we can see on the daily chart.
Nasdaq 100 Falls Below 18,000
Yesterday, the technology-focused Nasdaq 100 lost 2.96% after rebounding from the daily low of 17,435.38, the lowest level since May 2. The Nasdaq 100 remains relatively weaker than the broader market, driven by sell-offs in FANG stocks. However, it gained some strength later in the day and is likely to open 0.7% higher this morning.
VIX: New Long-Term High
The VIX index, a measure of market fear, accelerated its advance on Friday, nearing 30, and yesterday reached as high as 65.73—the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflects significant 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.
Futures Contract: Reversal or Just a Rebound?
Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Thursday, it reversed sharply lower after reaching a local high of around 5,601. On Friday, it neared the 5,300 level, and yesterday, it traded as low as 5,120. The sell-off has been unprecedented and crash-like.
Yesterday, I noted “Is it getting closer to capitulation and a short-term bottom? Most likely, though no positive signals are evident so far.”
The futures contract set a new local low, but the question remains: will it hold that bottom or extend the declines towards the 5,000 level? For now, it looks like a bottom is forming, but volatility is likely to persist.
Conclusion
In my Stock Price Forecast for August on Friday, I noted “a sharp reversal occurred, and by the end of the month, the S&P 500 experienced significant volatility following the sell-off. August is beginning on a very bearish note, but the market may find a local bottom at some point.”
Today, the market is set to open “slightly” higher following the recent volatility and declines. The most likely scenario appears to be a short-term consolidation, which could take the form of a bottoming pattern (bullish case) or simply a flat correction of the downtrend – before another leg lower.
My short-term outlook is now neutral.
Here’s the breakdown:
- The S&P 500 index accelerated its sell-off yesterday, reaching its lowest level since early May.
- The market found a short-term bottom, but this may only be temporary; no positive signals are evident.
- In my opinion, the short-term outlook is neutral.
The full version of today’s analysis - today’s Stock Trading Alert - is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.
And if you’re not yet on our free mailing list, I strongly encourage you to join it - you’ll stay up-to-date with our free analyses that will still put you ahead of 99% of investors that don’t have access to this information. Join our free stock newsletter today.
Thank you.
Paul Rejczak,
Stock Trading Strategist