Are stocks going to continue their Monday rebound ahead of presidential debate, CPI data?
Yesterday, I closed my profitable short position in S&P 500 futures contracts at the 5,462 level, during the opening of the cash market. This yielded a gain of 164 points from the 5,626 level on August 20.
This morning, the S&P 500 index is likely to open 0.3% higher following yesterday’s 1.16% rebound. Stock prices retraced some of Friday’s 1.7% decline, but the question remains: will they reverse the downtrend, or is this just an upward correction before another leg lower? Investors are now awaiting important CPI data tomorrow and the FOMC rate decision next week, which is contributing to growing uncertainty and likely volatility in the market.
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.”
Despite recent declines, investor sentiment remained elevated, as shown by the AAII Investor Sentiment Survey last Wednesday, which reported that 45.3% of individual investors are bullish, while 24.9% of them are bearish, down from 27.0% last week.
The S&P 500 index rebounded from the 5,400 level yesterday, as we can see on the daily chart.
Nasdaq 100: Below Recent Local Lows
The technology-focused Nasdaq 100 gained 1.30% on Monday, retracing some of Friday’s 2.7% decline. However, it remains below the important short-term resistance of 18,800, marked by local lows from Wednesday and Thursday. This morning, the Nasdaq 100 is likely to open 0.4% higher, led by rising Oracle (ORCL) stock following the company’s earnings release after yesterday's session closed.
VIX: Hovering Around 20
On Friday, the VIX index, a measure of market fear, reached a local high of 23.76, slightly surpassing its Wednesday’s local high. It still indicates elevated fear among investors, although it closed below the 20 level 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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
Futures Contract Approaching 5,500
Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it briefly fell below the 5,400 level, extending its decline. Yesterday's trading saw a rebound, which is continuing this morning as the market approaches the important 5,500 level. The resistance is also at around 5,550, marked by the recent local highs.
Conclusion
Monday’s trading session brought a rebound in stocks, with the S&P 500 bouncing from the 5,400 level, raising hopes of ending the correction and potentially reversing higher. While this scenario is possible, the upcoming CPI data tomorrow and the Fed announcement next week are likely to bring volatility. It’s also worth noting that after today's session closes, there will be a presidential candidate debate. This morning, the market is likely to open slightly higher, extending the rebound.
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 rebounded from Friday’s low, with the 5,400 level providing strong short-term support.
- Investors are eagerly awaiting CPI data on Wednesday and 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