Will stocks reverse their short-term downtrend following positive CPI data and earnings releases?
Stock prices fluctuated yesterday following the release of producer inflation data. The S&P 500 index pulled back near the 5,800 level but closed 0.11% higher. Today, it is expected to open 1.5% higher after the release of the Consumer Price Index (CPI), which came in at +0.4% month-over-month, matching expectations.
The S&P 500 is likely to recover more of its recent declines as investors await quarterly corporate earnings releases. Reports from major banks released this morning were generally better than expected, boosting sentiment.
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 slightly worsened again, as shown by last Wednesday’s AAII Investor Sentiment Survey, which reported that 34.7% of individual investors are bullish, while 37.4% of them are bearish.
The S&P 500 index rebounded from its November 6 (post-election day) daily gap up, as we can see on the daily chart.
Nasdaq 100 to Break Above 21,000
The Nasdaq 100 closed 0.13% lower yesterday, extending its short-term consolidation after recent declines. However, the technology index is expected to open 1.8% higher today and may attempt to retrace its early January declines.
VIX Retreated Below 20
On December 18, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. After dropping below 15 in late December, the VIX rose again, and on Monday, it reached a high of 22.04. Yesterday, it traded as low as 18.24, signalling reduced market fear.
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 Rally After CPI Data
This morning, the S&P 500 futures contract is trading above the 5,950 level after rebounding from yesterday’s intraday lows of 5,843. The market is breaking above it recent lows.
Conclusion
Consumer inflation data will likely push stock prices much higher this morning, and the S&P 500 index may retrace more of the recent declines.
The market rebounded from its election day daily gap-up on Monday, and that area remains a key support level.
The S&P 500 faces more uncertainty ahead of the upcoming quarterly earnings season, economic data, and Donald Trump’s inauguration on January 20.
Last Monday, in my Stock Price Forecast for January 2025, I wrote that “the stock market is poised for continued fluctuations following the post-election rally in November. Although the S&P 500 dipped by 2.5% last month, this appears to be just a correction of November’s gains.
Will the market resume its uptrend and reach new record highs? This appears likely at some point, driven by growing optimism ahead of Trump’s upcoming inauguration on January 20. However, rallies may provide selling opportunities, leading to a medium-term consolidation phase.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to retrace more of its recent declines following CPI release.
- 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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Paul Rejczak,
Stock Trading Strategist