Expectations are positive, but will stocks reach new record highs?
Stocks didn’t do much yesterday, with the S&P 500 index closing just 0.09% higher. The market has further extended its short-term consolidation following a retreat from last Thursday’s new record high of 5,505.53. Today, the index is likely to open 0.4% higher, as indicated by futures contracts. The Core PCE Price Index release has been as expected at +0.1% month over month. The S&P 500 remains relatively close to record highs, and for now, it only looks like a relatively flat correction of the uptrend.
In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.
However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”
The investor sentiment remained basically unchanged on Wednesday, as indicated by the AAII Investor Sentiment Survey, which showed that 44.5% of individual investors are bullish, while 28.3% of them are bearish (up from last week's reading of 22.5%). 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 index continues sideways after breaking its upward trend line, as we can see on the daily chart.
Nasdaq 100 Extends Its Rebound
Last Thursday, the technology-focused Nasdaq 100 index reached a new record high of 19,979.93, before retracing the advance and closing lower. On Friday and Monday, the market traded lower, but since Tuesday, it has been rebounding, reaching as high as 19,850 yesterday. This morning, the Nasdaq 100 is poised to open 0.5% higher, getting closer to the record high from last week.
VIX Gets Closer to 12
The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Since last Thursday, it has been closing above the 13 level, showing increasing fear in the market. Since Tuesday, the VIX is closing closed below 13 on hopes that a correction in stocks may be ending. Yesterday, it went closer to the 12 level.
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 Trades Above 5,550
Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Thursday, it reached a new high of around 5,588. Since then, the market has been fluctuating, reaching the support level at around 5,520. This morning, it is trading higher, yet still below the recent high.
Conclusion
The S&P 500 index is likely to open 0.3% higher today. For a few sessions, the market continued trading sideways after last Thursday’s intraday retreat, and today, it may attempt to get closer to the record. The recent trading action is best described as a flat correction of the uptrend.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 reversed lower from a new record high on Thursday; this week, it kept extending a consolidation.
- Recently, stock prices were reaching new record highs despite mixed data and growing uncertainty.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist