Stock prices appear to be stuck following their Friday’s reversal. Is this still a topping pattern?
Stock prices were little-changed on Monday, with the S&P 500 index dropping by 0.11% vs. its Friday’s daily close. The market went sideways following its Friday’s intraday reversal from a new record high of 5,189.26. Yesterday, it went briefly below the 5,100 level, before bouncing back and retracing most of its intraday decline.
Overall, investors were awaiting the important Consumer Price Index release today. The number came in as expected at +0.4% m/m, and the index is likely to extend a consolidation this morning. The S&P 500 futures contract is 0.3% higher, indicating a higher opening for the index.
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 yet, it was the same story again last week. However, on Friday, a much more pronounced profit-taking occurred.
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 last week’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.
Last Wednesday, the investor sentiment has improved again; the AAII Investor Sentiment Survey showed that an astounding 51.7% of individual investors are bullish, while only 21.8% 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 its over month-long upward trend line, however, yesterday, it was near that line as we can see on the daily chart.
Nasdaq 100 Broke Below 18,000
The technology-focused Nasdaq 100 index reached a new record high of 18,416.73 on Friday. However, it closed 1.5% lower, retracing the recent advances and getting closer to the 18,000 level again, and yesterday, it lost 0.37%. It remains relatively weaker than the broad stock market. For now, it looks like a consolidation following a multi-month rally.
VIX Reached 16 Yesterday
The VIX index, also known as the fear gauge, is derived from option prices. In the middle of last week, it remained elevated despite new records for the indexes, and yesterday, it reached as high as 16 as stock prices kept retracing their recent advances.
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 5,200
Let’s take a look at the hourly chart of the S&P 500 futures contract. It’s a new series of the contract, hence around 60 points relative advance on Friday (the futures contract prices in the inflation, measured by non-risk assets yield). This morning, the market is reacting to the mentioned consumer inflation data. It sold off towards yesterday’s lows, before bouncing back to around 5,200 again.
Conclusion
The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index breaking above 5,100, and the Nasdaq 100 index reaching above the 18,000 mark.
In my February 13 analysis, I noted that, “in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.”. Indeed, the correction occurred pretty fast, with the inflation number contributing to the downturn. However, the market quickly retraced the decline in the following days, and then rallied, led by Nvidia stock after its earnings release. Last week brought more uncertainty, and on Friday, bears took over, leading stock prices lower.
Today, the S&P 500 is likely to open slightly higher following as-expected CPI data. What could drive stock prices today? Investors are also eyeing the 10-year Bond Auction at 1:01 p.m. Last Tuesday, 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 late last week’s record-breaking advance, it remains a probable scenario.
A week ago, 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 go sideways again, despite the important CPI number release.
- 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