Will stock prices recover some of their losses following lower-than-expected inflation data?
Stocks went basically sideways yesterday, as investors hesitated following Wednesday’s sell-off. The S&P 500 rebounded to an intraday high of 5,935.52 but ultimately closed 0.09% lower, falling below the 5,900 level. This morning, the market is poised to open 0.5% lower, after an overnight weakness and the release of the Core PCE Price Index, which came in lower than expected at +0.1% month-over-month.
Last Monday, I noted that “the S&P 500 index reached a new record high of 6,099.97 on Friday. The key question remains whether the uptrend will continue, despite signs of short-term overbought conditions.” Wednesday’s sharp decline confirmed the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment slightly worsened before the sell-off. as shown by the Wednesday’s AAII Investor Sentiment Survey, which reported that 40.7% of individual investors are bullish, while 31.4% of them are bearish - a slight decrease from 31.7% last week.
The S&P 500 remains near local lows, as we can see on the daily chart.
Nasdaq 100: Nearing the 21,000 Level
The Nasdaq 100 index fell 0.47% yesterday, extending its Wednesday decline of 3.6%. The market is expected to open 1.4% lower, potentially breaking below the 21,000 level. Intraday rebound is possible later today, but no buy signals are evident.
VIX Remains Elevated
On Wednesday, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. It confirmed heightened fear in the market as stocks sold off. Although it initially dropped yesterday, the VIX climbed again by the close.
On the previous Friday, it dropped to a new local low of 12.70, its lowest since early July.
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 Contract Extended its Downtrend
This morning, the S&P 500 futures contract is trading below the 5,900 mark after overnight weakness and a failed rebound. The next support is at around 5,850, and the resistance is now at 5,900-5,930, among others.
Conclusion
Stock prices are likely to extend their short-term downtrend this morning. Wednesday’s Fed interest rate decision cast shadows on the stock market, and today, the spending bill crisis is adding to negativity. There may be more short-term volatility, and the market may find a short-term bottom at some point.
On Wednesday, I noted “A rotation within stocks continues, with some reaching record highs while recent leaders are lagging. Whether the market breaks higher after the Fed decision remains to be seen. Any breakout could lead to profit-taking, potentially extending a consolidation.” This has proven accurate, with the market forming a topping pattern that broke lower.
Last Monday, in my Stock Price Forecast for December 2024, I wrote “the stock market experienced a strong rally in November, driven by the presidential election outcome. While December is historically a bullish month, increased volatility and a short-term correction remain likely.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 has retraced its post-election rally, breaking below the 5,900 level.
- The market is seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist