Did stocks reverse their downtrend yesterday, or was it merely part of a consolidation?
Stocks rallied on Wednesday, with the S&P 500 index breaking above the 5,900 level again and closing 1.83% higher. The market reacted to quarterly earnings from major banks and the release of consumer inflation data. Will stocks continue higher and reach their record highs from early December? While the S&P 500 is expected to open 0.1% higher today, a short-term consolidation and profit-taking may follow yesterday’s rally.
Investor sentiment worsened again, as shown by yesterday’s AAII Investor Sentiment Survey, which reported that only 25.4% of individual investors are bullish, while 40.6% of them are bearish.
The S&P 500 index rebounded from its November 6 (post-election day) daily gap up on Monday, as we can see on the daily chart.
Nasdaq 100 Back Above 21,000
The Nasdaq 100 gained 2.31% yesterday, breaking back above the 21,000 level as major technology stocks, including NVDA and TSLA, rallied. Potential resistance is near 21,600, marked by recent highs. Overall, the index remains in a consolidation phase after a rally that began in August.
VIX Pulling Back
On December 18, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. After dropping below 15 in late December, the VIX rose again, and on Monday, it reached a high of 22.04. Yesterday, stock prices rally pushed the VIX towards the 16 level, indicating 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.
S&P 500 Futures: Uncertainty Near 6,000
This morning, the S&P 500 futures contract is trading near the 6,000 level. Resistance remains between 6,000–6,020, with the next level near 6,050, marked by recent highs. The market is extending a consolidation.
Conclusion
Stocks are expected to open virtually flat today, as investors digest yesterday’s rally and this morning’s mixed data. The S&P 500 is likely to remain within a consolidation that began after the early November election rally.
The S&P 500 faces more uncertainty ahead of the upcoming quarterly earnings season, economic data, and Donald Trump’s inauguration on Monday, January 20.
Last Monday, in my Stock Price Forecast for January 2025, I wrote that “the stock market is poised for continued fluctuations following the post-election rally in November. Although the S&P 500 dipped by 2.5% last month, this appears to be just a correction of November’s gains.
Will the market resume its uptrend and reach new record highs? This appears likely at some point, driven by growing optimism ahead of Trump’s upcoming inauguration on January 20. However, rallies may provide selling opportunities, leading to a medium-term consolidation phase.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to move sideways after yesterday’s CPI and earnings rally.
- The stock market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist