The S&P 500 reached a new record high, but will the uptrend continue?
Stocks prices rallied on Thursday, retracing Wednesday’s intraday pullback and reaching new record highs. This was a delayed reaction to the Fed’s interest rate cut on Wednesday. The S&P 500 index closed 1.70% higher after hitting an all-time high of 5,733.57. Today, the index is expected to open 0.1% lower, as indicated by futures contracts. The session will likely bring more volatility due to quadruple witching Friday, when a series of derivative instruments expire.
The question remains: will the uptrend continue, or is this just part of a volatile consolidation, potentially forming a topping pattern before a downward reversal? I still think that the market is forming a high, and the seasonal pattern will play out in such a way that indexes will set their highs in September, with the low of the correction occurring in October.
Therefore, I am maintaining a speculative short position, opened on Monday.
Investor sentiment improved, as shown by the Wednesday’s AAII Investor Sentiment Survey, which reported that 50.8% of individual investors are bullish, while only 26.4% of them are bearish, down from 31.0% last week.
The S&P 500 index broke above its July high, as we can see on the daily chart.
Nasdaq 100: Getting Closer to 20,000 Again
The tech-heavy Nasdaq 100 index closed 2.56% higher, nearing the important 20,000 level after breaking out of its recent trading range along the 19,500 level. However, the index remains relatively weaker than the broader market, trading slightly below the local high from August 22 and significantly below the July 10 record high of 20,690.97. This morning, the Nasdaq 100 is expected to open 0.2% lower.
VIX: Lower as Stocks Advance
On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. However, a stock rebound last week pushed the VIX lower. Yesterday, it reached closer to the 16 level again.
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: Consolidating Along New Records
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading sideways after yesterday’s record-breaking rally. A potential resistance level remains at 5,800, with support in the 5,730–5,750 range.
Conclusion
Stock prices reached new record highs on Thursday, but the market appears to be more and more overbought and susceptible to a correction in the short-term. Today, the S&P 500 is likely to open 0.1% lower, extending a consolidation following yesterday’s record-breaking rally.
On Wednesday, I noted “A "buy the rumor, sell the news" scenario seems likely, but a bullish breakout to new highs can't be ruled out either.” Yesterday’s rally invalidated a quick reversal scenario, but the pace of the market’s advance suggests that a downward correction is likely at some point. Overall, the market outlook remains bullish.
I opened a speculative short position in the S&P 500 futures contract on Monday.
In my Stock Price Forecast for September 2024, I noted that, “the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. (…) sharp reversal suggests more volatility in September. Last month, I wrote that ‘August is beginning on a very bearish note, but the market may find a local bottom at some point.’ The same could be said today, and September will likely not be entirely bearish for stocks.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 is likely to fluctuate following Thursday’s rally.
- The market may still be forming a topping pattern before a downward correction.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist