Are stocks in a new uptrend, or is this still just a rebound?
Monday’s trading session didn’t change much for the stock market, as the S&P 500 index remained flat compared to Friday’s closing price, after reaching a new local high of 5,371.20. While the market has retraced more of its recent declines, the question remains: is this the start of a new uptrend or just a correction before another downturn? Today, the S&P 500 is likely to open 0.5% higher, following a lower-than-expected Producer Price Index release of +0.1% month over month.
The investor sentiment worsened last week, as indicated by Wednesday's AAII Investor Sentiment Survey, which showed that 40.5% of individual investors are bullish, while 37.5% of them are bearish – up from 25.2% last week.
The S&P 500 index rebounded from 5,100 last week, as we can see on the daily chart.
Nasdaq 100: Slightly Higher, Volatility Dropping
The technology-focused Nasdaq 100 gained 0.16% yesterday, slightly extending its short-term uptrend and continuing its rebound from last Monday’s local low of 17,435.38. Yesterday, it reached as high as 18,665.75. This morning, the Nasdaq 100 is likely to open 0.8% higher, further extending the uptrend.
VIX Remained Close to 20
The VIX index, a measure of market fear, accelerated its advance on previous Friday, nearing 30, and last Monday, it reached as high as 65.73 - the highest level since the 2008 financial crisis and the COVID sell-off in 2020. This reflected significant fear in the market. However, on Friday, the VIX dipped closer to the 20 level, reducing market volatility, and yesterday, it was as low as 18.89.
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.
Futures Contract Nearing Previous Lows
Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Monday, it traded as low as 5,120, rebounded to around 5,360 on Wednesday, then pulled back below 5,200 before rebounding to local highs closer to 5,400. Since Friday, trading action has been much calmer, and volatility decreased. Is this a sign of a failing rebound? The key resistance level remains around 5,430, marked by the previous local lows.
Conclusion
In my Stock Price Forecast for August, I noted “a sharp reversal occurred, and by the end of the month, the S&P 500 experienced significant volatility following the sell-off. August is beginning on a very bearish note, but the market may find a local bottom at some point.”
The S&P 500 is likely to open 0.5% higher, extending its short-term uptrend. However, the market may experience further consolidation as investors await the important Consumer Price Index release tomorrow. Today’s PPI number led to some volatility, but the CPI is much more important and likely to cause more volatile market movements.
On Friday, I wrote “(…) rebound brought some hope for bulls, but it seems they are not out of the woods yet. The recent sell-off was significant, and it will likely take more time to recover.
There is also a chance that the current advances are merely an upward correction, and the market could revisit its lows at some point.”
This week, we may see more uncertainty and volatility in both directions.
My short-term outlook remains neutral.
Here’s the breakdown:
- The S&P 500 index extends its rebound from last week’s Monday’s low.
- The market found a short-term bottom, but this may only be temporary; still, no confirmed positive signals are evident.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist