S&P 500 approached its all-time high again – is this still a potential topping pattern?
Stocks were gaining on Tuesday, but the overall picture of the S&P 500 index didn’t change that much, with the index gaining 0.56%, yet, remaining within a two-week-long consolidation. The market continued to fluctuate below the previous Friday’s new record high of 5,189.26, and above the support level of around 5,100.
The question remains: will stocks break higher and reach new all-time highs? This morning, the S&P 500 futures contract is unchanged, indicating a neutral opening for the index today. The market will be waiting for the very important FOMC Rate Decision at 2:00 p.m., and the subsequent FOMC Press Conference at 2:30 p.m.
On March 1, I mentioned about February, “Despite concerns about stock valuations, the market rallied to new record highs, fueled by hopes of the Fed's monetary policy pivot and the AI revolution.”. And in the first weeks of March, it was the same story again. However, last week, the S&P 500 went closer to its record high once more, only to retreat towards 5,100 on Friday. Yesterday, it went closer to highs again, signaling a potential breakout post-Fed announcement.
While indexes were hitting new record highs, most stocks were essentially moving sideways. So, the question is – is this a topping pattern before a more meaningful correction? Still, there have been no confirmed negative signals; however, one might consider the possibility of a trend reversal.
Recently, the stock market continued to rally, fueled by advances in a handful of tech sector stocks, but as I wrote on February 7, “We may have to deal with a correction or consolidation of several weeks of advances. With the season of quarterly earnings announcements coming to an end and a series of important economic data, profit taking may follow.” Despite the previous week’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.
The investor sentiment remains elevated; last week on Wednesday’s AAII Investor Sentiment Survey showed that 45.9% of individual investors are bullish, while only 21.9% of them are bearish. 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.
The S&P 500 index is still trading above an over month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 Fluctuates Along 18,000
On March 8, the technology-focused Nasdaq 100 index reached a new record high of 18,416.73, however, it quickly retraced the advance, and since then, it has been trading sideways. Last Friday, the market broke below previous local lows. On Monday, it went as high as 18,124, and yesterday, it closed above the 18,000 level, gaining just 0.26%.
VIX Dropped Below 14
The VIX index, also known as the fear gauge, is derived from option prices. On Friday, it was as high as 15.50, and yesterday, it dipped below the 14 level, indicating a lack of fear ahead of today’s Fed announcement.
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 Remains Close to Record High
Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading along the early March record high of around 5,257. The support level is at 5,200-5,220, and the resistance level remains at 5,250-5,260.
While it still appears to be consolidating within an uptrend, the possibility of a topping pattern cannot be dismissed.
Conclusion
The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index getting close to the 5,200 level, and the Nasdaq 100 index reaching above the 18,000.
Today, the S&P 500 index is likely to open virtually flat. It will be all about the mentioned FOMC news later in the day. On March 5, I wrote that “The most likely scenario is an extended consolidation at some point, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.” Despite the recent record-breaking advance, it remains a probable scenario.
In my Stock Price Forecast for March, I noted “So far, stock prices have been trending upwards in the medium to long term, reaching new record highs. The prudent advice one could give right now is to remain bullish or stay on the sidelines if one believes stocks are becoming overvalued and may need a correction. It's likely that the S&P 500 will continue its bull run this month. However, we may encounter a correction or increased volatility at some point as investors start to take profits off the table.”
For now, my short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 continues to trade relatively close to its record high, all eyes are on today’s Fed.
- It still appears to be consolidating within an uptrend.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist