A lower inflation number is likely to push stock prices higher. Is the correction over?
Thursday’s trading session brought more declines for the stock market, with the S&P 500 index breaking the 5,250 level and closing 0.60% lower. The market has extended its short-term downtrend following a failed attempt at rebounding on Friday and Tuesday. Yesterday, the index was at its lowest since May 14.
Last Thursday, stock prices sold off after a higher open, despite NVDA stock breaking records following its earnings release. On Friday, the market rebounded, and since then it has been basically moving sideways. Yesterday, the S&P 500 broke the support level of 5,250, and this morning it is expected to open 0.3% higher after the important Core PCE Price Index release, which was lower than expected at +0.2% month over month.
Last Friday, I asked “Is this a downward reversal or just quick profit-taking?” There was still a chance that it was only a flat correction and a consolidation within an uptrend. However, Wednesday's and especially yesterday’s trading session gave bears hope of a downward reversal.
Investor sentiment worsened, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 39.0% of individual investors are bullish (a decrease from last week's reading of 47.0%), while 26.7% of them are bearish. 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.
The S&P 500 extended its decline, reaching its March–April trading range, as we can see on the daily chart.
Nasdaq 100 Is Closer to 18,500 Again
Last Thursday, the technology-focused Nasdaq 100 index reached a new record high of 18,907.54 before closing lower. Since Friday, it has been rebounding; however, on Wednesday, it retraced that advance, and yesterday, it continued a short-term downtrend. This morning, the Nasdaq 100 is likely to open 0.2% higher.
VIX Crawling Higher
The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 - the highest since late October, signaling fear in the market.
Recently, it was declining again, and last Thursday, it reached its lowest point since November 2019 at 11.52. However, this week, the VIX has been gaining, reaching almost 15 yesterday.
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 Fluctuates Following Declines
Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Thursday, it pulled back from a new record high of around 5,368 and fell by almost 100 points, before rebounding up to around 5,340. Since then, it has been consistently declining, reaching a low of 5,230.50 this morning. The support level is at 5,200-5,220, and the resistance remains at 5,280-5,300.
Conclusion
The S&P 500 index is likely to open higher this morning, extending its short-term downtrend in reaction to a higher-than-expected Core PCE Price Index release. However, for now, it looks like a rebound within a short-term downtrend, and the market may see more uncertainty following its Wednesday-Thursday decline.
Yesterday, I wrote “It’s hard to tell if the recent price action was just a flat correction of the uptrend or a topping pattern before a downward reversal. For now, it looks like another potential profit-taking action following recent record-breaking advances. However, a decisive breakdown of the 5,250 support level, which was marked by local highs from March and April, would likely lead to a deeper correction of the advance from the early May local lows.”
So, the market is, in fact, experiencing a slightly deeper correction of the uptrend, with the S&P 500 index dipping below the important 5,250 level yesterday. How far lower will it go? It’s hard to say. The short-term uptrend is lower, but the medium-term one is still higher. Today, the month of May is ending, and it’s likely that the market will get volatile at the end of the day due to a so-called ‘window dressing’ price action.
In my Stock Price Forecast for May, I noted “Where will the market go in May? There's a popular saying: 'Sell in May and go away,' but statistics don't consistently support such clear seasonal patterns or cycles. The safe bet for May is likely sideways trading, with investors digesting recent data suggesting that inflation may not be transitory, and the Fed could maintain its relatively tight monetary policy. However, economic data isn't entirely negative, and strong earnings from companies may continue to fuel the bull market.”
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 is likely to open higher, rebounding on the Core PCE Price Index release.
- On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance. Recently, the S&P 500 retraced all of its mid-April sell-off, reaching new record highs above 5,300.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist