Will stocks continue their rally after the higher-than-expected PPI data?
Stock prices initially fell on Wednesday as investors reacted to a slightly higher-than-expected Consumer Price Index (CPI) reading. However, later in the day, the market regained strength, erased its earlier losses, and closed 1.07% higher. The S&P 500 index rebounded from the 5,400 level again, indicating a strong support level.
This morning, the Producer Price Index (PPI) came in slightly above expectations at +0.2% month-over-month. The S&P 500 index is expected to open 0.1% higher, down from its pre-data release level.
Uncertainty remains regarding the Yen carry trade, the upcoming FOMC Rate Decision, and the Bank of Japan’s (BOJ) announcement next week.
On August 21, I wrote “Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”
Investor sentiment worsened, as shown by AAII Investor Sentiment Survey yesterday, which reported that 39.8% of individual investors are bullish, while 31.0% of them are bearish, up from 24.9% last week.
The S&P 500 index broke above the 5,500 level yesterday, as we can see on the daily chart.
Nasdaq 100: Back Above 19,000 Again
The technology-focused Nasdaq 100 gained 2.17% yesterday, driven by an 8% surge in Nvidia (NVDA) stock, among others, nearly erasing its early September decline. This morning, the Nasdaq 100 is expected to open 0.2% higher following the producer inflation report.
VIX Dipped Below 20
Last Friday, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. Yesterday, the rebound in stocks pushed the VIX lower, closing below 18, the lowest since September 3.
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: Consolidation After Yesterday’s Rally
Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it traded near Friday’s local low around the 5,400 level before rebounding and breaking out of its recent trading range. The resistance level is now at 5,600, marked by recent local lows. The producer inflation release caused some volatility, but the market remains within an intraday consolidation.
Conclusion
Yesterday’s session saw a roller-coaster ride in the S&P 500, ending on a positive note at the highest level since September 3. This morning, the index is expected to open slightly higher, though a downward correction could follow.
I closed my profitable short position on Monday, at 5,462. This position, opened on August 20 at 5,626, generated a 164-point gain.
Last Wednesday, 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 neutral.
Here’s the breakdown:
- The S&P 500 index is set to open slightly higher following the PPI release.
- Investors are awaiting the FOMC Rate Decision next week.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist