The CPI release is likely to drive stock prices higher. Is the correction over?
Stocks dipped again yesterday, with the S&P 500 index closing 0.3% lower, extending its short-term decline. For now, the market remains within a correction of recent advances. This morning, it is expected to open 0.4% higher following the Consumer Price Index (CPI) release, which came in as expected at +0.3% month-over-month. The market is likely to retrace some of its recent losses, potentially continuing its sideways trend.
On Monday, I noted that “the S&P 500 index reached a new record high of 6,099.97 on Friday. The key question remains whether the uptrend will continue, despite signs of short-term overbought conditions.” Monday’s and Tuesday’s pullback appears be a short-term correction or perhaps the beginning of a consolidation phase.
Investor sentiment has improved significantly last week. as shown in Wednesday’s AAII Investor Sentiment Survey, which reported that 48.3% of individual investors are bullish, while 30.7% of them are bearish - a decrease from 38.6% the previous week.
The S&P 500 has dipped back to its upward trendline, as we can see on the daily chart.
Nasdaq 100 Remains Relatively Stronger
The Nasdaq 100 closed 0.34% lower yesterday, slightly extending its short-term downtrend. On Friday, it reached a new record high of 21,626.31, and yesterday it fell as low as 21,313.27. This morning, the Nasdaq 100 is expected to open 0.6% higher after the CPI release. For now, it seems to be consolidating within a relatively flat correction within the ongoing uptrend.
There are no immediate negative signals, but short-term overbought conditions could lead to a deeper correction.
VIX Remains Above 14
The VIX index, a measure of market volatility, dropped to a new local low of 12.70 on Friday, its lowest since early July. Yesterday, the pullback in stock prices pushed the VIX higher again, closing above 14. Despite the increase, volatility remains relatively low.
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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.
S&P 500 Futures Rebound After Inflation Data
The S&P 500 futures contract is rebounding this morning, reaching a local high of 6,070. Resistance remains in the 6,100–6,110 range, with support at 6,050, the previous high. For now, it appears to be another upward correction.
Conclusion
Stock prices are expected to open higher as sentiment improves following the CPI release. For now, the market appears to be consolidating after its recent rally. A rotation within stocks continues, with some reaching record highs while recent leaders are lagging.
Last Monday, in my Stock Price Forecast for December 2024, I wrote “the stock market experienced a strong rally in November, driven by the presidential election outcome. While December is historically a bullish month, increased volatility and a short-term correction remain likely”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to rebound after a two-day decline.
- The market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist