Stocks rebounded on Biden news yesterday. Was it a reversal or just an upward correction?
Stock prices rebounded on Monday, with the S&P 500 index gaining 1.08% after retracing some of its last week’s declines. On Friday, the market set a local low at 5,497.04, and yesterday, it was as high as 5,570.36. The rebound was driven by weekend news about Joe Biden’s decision to quit the election race, and this morning, futures contracts point to a virtually flat open for the index.
On July 09, I opened a speculative short position in S&P 500. This position is still profitable.
Investor sentiment increased significantly last Wednesday, as indicated by the AAII Investor Sentiment Survey, which showed that 52.7% of individual investors are bullish, while 23.4% of them are bearish.
As I mentioned in my stock price forecast for July, “While more advances remain likely, the likelihood of a deeper downward correction also rises. Overall, there have been no confirmed negative signals so far, but the May gain of 4.8% and June gain of 3.5% suggest a more cautionary approach for July (…) The market will be waiting for the quarterly earnings season in the second half of the month. Plus, there will be a series of economic data, including the CPI release on July 11, the Advance GDP number on July 25, and the FOMC Rate Decision on July 31.”
The S&P 500 index rebounded from its June consolidation and the crucial 5,500 level, as we can see on the daily chart.
Nasdaq 100 Remained Relatively Weaker
The technology-focused Nasdaq 100 index rebounded from Friday’s local low of 19,479.38, reaching as high as 19,861.72 yesterday and closing 1.54% higher. This appears to be a correction within an uptrend as the index retraced some of its decline from Thursday-Friday. The important resistance level remains at 20,000.
On the previous Thursday, I concluded that “There are short-term overbought conditions, and the market is likely to top at some point.” This proved accurate with the recent sharp downward reversal and a sell-off last week. This morning, the Nasdaq 100 is likely to open 0.1% lower.
VIX Retreated to 15
The VIX index, a measure of market fear, has recently been hovering around the 12-13 level, indicating relatively low fear. However, since Thursday, it has been approaching the 17 level, confirming a downward correction in the stock market. Yesterday, the VIX pulled back to 15 on stock prices rebound (the chart seems to have a glitch with lowest reading below 11 on Friday).
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: Back Above 5,600
Let’s take a look at the hourly chart of the S&P 500 futures contract. It’s trading higher this morning after pulling back from yesterday’s daily highs. The market rebounded from an overnight low of around 5,588. It still appears to be an upward correction of the short-term downtrend. The nearest important resistance level is at 5,620, and the support level is at 5,580.
Conclusion
The S&P 500 index rebounded yesterday, but was it an upward reversal or just a correction following recent declines? For now, it looks like a correction. The next market direction will likely be determined by the upcoming quarterly earnings releases. Today, after the session closes, we will get numbers from GOOG and TSLA. The market is also awaiting a series of economic data: the Flash PMIs release tomorrow, the Advance GDP on Thursday, and the Core PCE Price Index on Friday. Overall, yesterday’s rebound wasn’t much of a game-changer, and it seems likely that we will see new lows in the near future.
My speculative short position in the S&P 500 futures contract, opened on July 9, is still profitable.
Quoting my stock price forecast for July, “Investors continue pricing in the Fed’s monetary policy easing that is supposed to happen this year. Hence, a medium-term downward reversal still seems a less likely scenario. However, the recent record-breaking rally may be a cause for some short-term concern as a downward correction may be coming.”
For now, my short-term outlook remains bearish.
Here’s the breakdown:
- The S&P 500 index retraced some of its last week’s sell-off; for now, it looks like a correction of the downtrend.
- Investors are waiting for economic data and quarterly earnings releases.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist