S&P 500 reached a new record yesterday, but will a handful of AI stocks drive it even higher?
Thursday brought us new record high for the S&P 500 index, which gained 1.03%, driven by Nvidia and Meta Platforms record-breaking rallies. So, it was still an AI-stocks-connected advance. Nonetheless, the new all-time high of the S&P 500 is at 5,165.62.
On Tuesday, the market reversed from its Monday's new record high of 5,149.67, falling back below the 5,100 level. What caused the decline? It was simply profit-taking action.
Last Friday, 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 on the first trading day of March. However, on Monday, some profit-taking emerged, and on Tuesday, a full-scale downward correction occurred. But bulls took over once again, and yesterday, the market extended its long-term uptrend.
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 yesterday’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.
This morning, the S&P 500 futures contract is down by 0.1%, indicating a slightly lower to neutral opening for the index. It’s worth mentioning that Nvidia stock is trading in the pre-market at a new record high, reaching the $950 level (+2.5%). Today’s Nonfarm Payrolls release came in at +275,000, higher than expected, and the Unemployment rate has also been higher than expected at 3.9%.
On 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 continues to trade above its over month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 – New Record, but…
The technology-focused Nasdaq 100 index reached a new record high of 18,337.95 yesterday, however, it was just 5 points above its last Friday’s high. It remains relatively weaker than the broad stock market, and for now, it looks like a consolidation following a multi-month rally.
VIX - Still Above 14
The VIX index, also known as the fear gauge, is derived from option prices. Stock prices rallied on Friday, leading the VIX lower as it approached the 13 level. It went closer to previous lows, indicating a growing complacency in the market. However, on Tuesday, the VIX moved sharply higher, briefly breaking above the 15 level. On Wednesday and yesterday, it remained elevated despite new records for the indexes.
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 Trades Along New High
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 advance vs. yesterday’s prices (the futures contract prices in the inflation, measured by non-risk assets yield). However, the market is slightly retreating from the new high of around 5,238. The support level is at 5,180-5,200.
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. This week brought more uncertainty, resulting in Tuesday's declines, but in the end, bullish sentiment prevailed once again.
Today, the S&P 500 is likely to open lower, retracing some of its yesterday’s advance. On 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 yesterday’s record-breaking advance, it remains a probable scenario.
On Friday, I noted in my Stock Price Forecast for March, “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 retrace some of its yesterday’s rally this morning.
- Currently, it 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