Will stocks reverse their short-term downtrend?
The S&P 500 ended December on a negative note, closing 0.43% lower. The index neared its Monday local low and broke below the 5,900 level. However, this morning, the S&P 500 is expected to open 0.8% higher, retracing some of its recent weakness.
On December 9, 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.” The sharp decline following the Fed’s release confirmed that the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment has worsened again, as shown by the yesterday’s AAII Investor Sentiment Survey, which reported that 35.4% of individual investors are bullish, while 34.2% of them are bearish.
The S&P 500 index continues to trade near its mid-December lows, as we can see on the daily chart.
Nasdaq 100 Remains Near 21,000
The Nasdaq 100 index lost 0.87% on Tuesday, dropping to a new local low near its December 20 low of around 20,914. Today, the technology-heavy index is expected to open 1.0% higher. Further fluctuations are likely following November - December rally.
VIX Remains Elevated
On December 18, 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. Then, the VIX dropped below 15 but rebounded last Friday, reaching a high of 19.22 on Monday.
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 Attempts to Rebound
This morning, the S&P 500 futures contract is rebounding and moving closer to the 6,000 level. The support remains at 5,900-5,920, with resistance is at 6,000. The market may continue sideways as investors take profits following the recent rally.
Conclusion
Stock prices are moving sideways after pulling back on Friday and Monday. Today, the market is set to open higher, marking a positive start to the new year. However, volatility is likely to remain elevated as the correction appears far from over.
Last Friday, I noted “The key question remains: Will the S&P 500 continue higher and reach new records, or is this rebound part of a broader consolidation? Uncertainty and some profit-taking may dominate the final trading days of the year.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to retrace some of its recent weakness.
- The stock market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist