Stock prices dropped following yesterday’s Fed announcement – is a new downtrend beginning?
The stock market reacted negatively to yesterday's release of the Fed's monetary policy and Jerome Powell's press conference. The S&P 500 index sold off by 1.61% after opening much lower due to Tuesday's after-hours quarterly earnings releases from Microsoft, Alphabet, and AMD. It broke below the 4,900 and, at the close, dipped even below 4,850 mark.
Recently, the market continued its uptrend following Monday’s breakout above 4,900 level. The upward momentum has been fueled by earnings releases and expectations of a more accommodative monetary policy from the Federal Reserve. However, yesterday, the Fed's pivot in monetary policy became less obvious, leading to a sell-off in stocks.
Furthermore, investor sentiment significantly improved on Wednesday, the AAII Investor Sentiment Survey showed that 49.1% of individual investors are bullish. 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.
On Tuesday, I wrote that “Despite new highs, it seems that a correction scenario is likely in the near term. (…) caution may be advised, as a correction or consolidation could occur at some point.”, and the prediction proved correct. The S&P 500 rallied from its previous Wednesday’s daily low of around 4,715 – an advance of 216 points. Yesterday, it retraced 86 points from Tuesday’s record high of 4,931.09.
The S&P 500 futures contract is trading 0.3% higher this morning, indicating a rebound at the opening of today’s cash market trading session. The S&P 500 is expected to retrace some of its yesterday’s decline, remaining below 4,900 level. Currently, the main focus is on tomorrow’s monthly jobs data. Nevertheless, investors eagerly await key earnings releases after today's session close, including reports from AAPL, AMZN, and META.
The market broke below its week-long upward trend line yesterday, as we can see on the daily chart.
Nasdaq Also Sold Off
Last Wednesday, the technology-focused Nasdaq 100 index reached a new all-time high at the level of 17,665.26. However, this week, it failed to extend the uptrend, and yesterday, it lost 1.94% after breaking below short-term local lows.
In early January, the Nasdaq 100 bounced sharply, followed by another advance and closing above the important daily gap down, which was a positive signal. Consequently, it broke to new record highs. While yesterday’s decline may signal the beginning of a new downtrend, for now, it appears to be just a correction within an uptrend.
VIX Is Back Above 14
The VIX index, also known as the fear gauge, is derived from option prices. While it continues to trade sideways, there have been attempts at a breakout above the 15 level. Yesterday's stock market rout pushed the VIX above 14 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 Below 4,900
Let’s take a look at the hourly chart of the S&P 500 futures contract. This week, it reached new record highs, nearing the 4,960 level, and yesterday, the market sold off on Fed news. The low was at around 4,866, and this morning, it’s trading 24 points higher, yet still below the 4,900 level.
Conclusion
The S&P 500 index is expected to open 0.3% higher, retracing some of yesterday’s sell-off. The market may experience a period of higher volatility following yesterday’s downturn. Investors are awaiting the mentioned key earnings releases today and the monthly jobs statistics tomorrow.
On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, the previous Friday’s price action left no illusions of a potential medium-term trend reversal. On Tuesday, I noted that “The market is overbought in the short term, but predicting a correction is currently very challenging.”, and it proved correct – a correction basically came out of nowhere, triggered by the Fed’s release.
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The index approached the peak of a short-term uptrend this week, which was confirmed by yesterday’s sell-off.
- For now, it appears to be a downward correction of the January rally.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist