Will stocks retrace their Friday sell-off, or just bounce and resume the downtrend?
Stocks sold off on Friday, with the S&P 500 index declining 1.71% and retracing its recent advances. The market reacted to uncertainty following data releases, geopolitical developments, and other factors. Overall, it extended a consolidation after the early January rally. Today, the S&P 500 is expected to open 0.5% higher, recovering some of Friday’s decline.
Investor sentiment remained relatively weak, as shown by the last Wednesday’s AAII Investor Sentiment Survey, which reported that 29.2% of individual investors are bullish, while 40.5% of them are bearish.
The S&P 500 index pulled back to around 6,000, as we can see on the daily chart.
S&P 500 Pulled Back Last Week
The S&P 500 closed 1.66% lower last week compared to the previous Friday’s close, retracing the prior weekly advance of 1.5%. The index extended its consolidation around the 6,000 - 6,100 level, with support remaining near 5,900, marked by local lows.
Nasdaq 100 Dropped Over 2%
The Nasdaq 100 lost 2.06% on Friday, retracing its recent gains that led to a new record high of 22,222.61 last Wednesday. Today, it is expected to open 0.4% higher, though uncertainty remains.
VIX Rebounded from 15
The VIX index, a measure of market volatility, has been recently moving along the 15 level. On Friday, it surged toward 20, reaching a daily high of 19.03, confirming rising fear among investors.
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 Rebounding After Friday’s Sell-Off
This morning, the S&P 500 futures contract is trading around 6,060, after rebounding from a local low of 6,025 on Friday. It has returned to the previous support levels around 6,000–6,020. While this still appears to be part of a consolidation, breaking below Friday’s low could signal further downside.
Conclusion
Stocks are likely to open higher today, rebounding and retracing some of Friday’s declines. However, this may just be a short-term correction.
The recent rally was fueled by hopes for a resolution to the Russia-Ukraine conflict.
In Friday’s analysis, I mentioned that “in the near term, the market may consolidate or face profit-taking, with investors reacting to geopolitical developments and upcoming economic data.”
This has proven accurate, and more uncertainty may be ahead.
In my Stock Price Forecast for January 2025, I noted “...recent rallies have provided selling opportunities. What will February bring? The earnings season is in full swing, likely adding to volatility. Political developments are increasing uncertainty. The market's ongoing consolidation since November may be forming a medium-term topping pattern ahead of some more meaningful downward correction. However, no confirmed bearish signals have appeared yet.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is expected to rebound after Friday’s sell-off.
- 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