Will stocks continue their uptrend? Thursday cast some doubt on the bullish scenario.
Expectations before the opening of yesterday’s trading session were very positive, and the S&P 500 index reached a new record high of 5,767.37. However, it pulled back and ultimately closed just 0.40% higher. This morning, the index is likely to open virtually flat, as indicated by futures contracts.
I still think that the market is forming a high, and the seasonal pattern will play out in such a way that indexes will set their highs in September, with the low of the correction occurring in October. I am still maintaining a speculative short position, opened last Monday (September 16).
Investor sentiment remains elevated, as shown by the Wednesday’s AAII Investor Sentiment Survey, which reported that 49.6% of individual investors are bullish, while only 23.7% of them are bearish, down from 26.4% last week.
The S&P 500 continues its record-breaking advance, as we can see on the daily chart.
Nasdaq 100 Broke Above 20,000, but…
The Nasdaq 100 gained 0.72% on Thursday, however, it pulled back from the daily high of 20,273.30. This week, it continued to crawl higher, though it remained below 20,000. Yesterday, the Nasdaq broke above that level but failed to move significantly higher. Resistance remains around 20,250. This morning, the Nasdaq 100 is expected to open 0.1% higher.
VIX Remains Near 15
On September 6, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. However, a stock rebound last week pushed the VIX lower. Yesterday, it fell to 14.90, its lowest level since late August.
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 Fluctuates Around 5,800
Let’s take a look at the hourly chart of the S&P 500 futures contract. It broke above the 5,800 level yesterday, extending its short-term uptrend. However, it saw an intraday pullback from a new record high of around 5,830. The support level remains at 5,780–5,800.
Conclusion
Stock prices are likely to open virtually flat this morning, with the S&P 500 index fluctuating near the 5,750 level. Will the uptrend continue despite overbought conditions? While there have been no confirmed negative signals, the advance seems overstretched.
Last Wednesday, I noted “A "buy the rumor, sell the news" scenario seems likely, but a bullish breakout to new highs can't be ruled out either.” Last Thursday’s rally invalidated a quick reversal scenario. While the overall market outlook remains bullish, this could also be the formation of a topping pattern before a more significant downward correction.
I opened a speculative short position in the S&P 500 futures contract on September 16.
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 bearish.
Here’s the breakdown:
- The S&P 500 reached a new record high yesterday.
- The market may still be forming a topping pattern before a downward correction.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist