S&P 500 continues sideways ahead of a long holiday weekend. Is this just a flat correction?
Tuesday’s trading session was third in a row with a slight decline of the S&P 500 index. The stock market keeps retracing its last week’s record-breaking rally; however, it is doing so at a very slow pace. On Thursday, the S&P 500 reached a record high of 5,261.10, and yesterday, it traded as low as 5,203.42. Last week, stock prices were influenced by the FOMC Rate Decision on Wednesday; this week, investors are bracing for economic data releases, including tomorrow’s GDP and Friday’s Core PCE Price Index. However, with a long holiday weekend approaching, volatility may be decreasing.
This morning, the S&P 500 futures contract is gaining 0.4%, indicating a rebound at the opening of the index. The question remains: will the last Thursday’s surge lead to a downward correction and a potential retracement of the advance? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.
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 last week, it was all about that Fed pivot, hence a positive market reaction. The S&P 500 index still seems to be crawling a wall of worry here.
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.
Quite surprisingly, the investor sentiment worsened a bit last week; the Wednesday’s AAII Investor Sentiment Survey showed that 43.2% of individual investors are bullish, while 27.2% of them are bearish, up from 21.9% last week. 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 approaches its over month-long upward trend line again, as we can see on the daily chart.
Nasdaq 100 Hovers Near 18,200
Last Thursday, the technology-focused Nasdaq 100 index reached a new record high of 18,464.70, extending its long-term uptrend yet again. However, it retraced most of the intraday advance, and it went back below a local high from March 8. The market retreated back within the recent consolidation, indicating a failed breakout attempt. Potential short-term support level remains at 18,200.
VIX Fluctuates Along 13
The VIX index, also known as the fear gauge, is derived from option prices. Last Thursday, the index dipped slightly below the 12.50 level, before bouncing closer to 13 later in the day. It was the lowest since mid-January, indicating a lack of fear in the market. Yesterday, it kept fluctuating along the 13 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 – Below 5,300
Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Wednesday, it broke above the recent trading range as markets reacted to the FOMC release. Yesterday, the market retraced more of the advance, and this morning, it’s rebounding closer to the 5,300 level again. The resistance level is at 5,320, marked by the record high, and the support level is at 5,260, marked by the previous highs.
Conclusion
Today, the S&P 500 index is likely to open 0.4% higher, retracing yesterday’s decline. The market is basically still going sideways following last week’s advances. More pronounced profit-taking action may be in cards at some point. However, as of now, there have been no confirmed negative signals.
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 is likely to continue a short-term consolidation following last week’s rally, with markets anticipating a long holiday weekend.
- In the medium term, stock prices are overbought, suggesting the potential for a correction.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist