Stocks continue to rally ahead of the Fed release tomorrow. Are they approaching local highs?
The stock market paused on Monday, with the S&P 500 closing just 0.13% higher after last week’s rally. The index is once again approaching its July 16 record high of 5,669.67. But will the uptrend continue? Today, the index is expected to open 0.3% higher as markets anticipate the FOMC rate decision tomorrow. In the short term, the market appears increasingly overbought, making a correction likely at some point.
Although there are no confirmed negative signals, I decided to open a speculative short position yesterday.
Last week, the investor sentiment worsened, as shown by AAII Investor Sentiment Survey on Wednesday, which reported that 39.8% of individual investors are bullish, while 31.0% of them are bearish, up from 24.9% last week.
The S&P 500 index is nearing its July record high, as we can see on the daily chart.
Nasdaq 100: Lower Despite S&P 500 Gains
The tech-focused Nasdaq 100 lost 0.47% yesterday, retracing Friday’s gains. It remains relatively weaker than the broader market, trading below the local high from August 22 and far beneath the July 10 record high of 20,690.97. However, this morning, the Nasdaq 100 is expected to open 0.6% higher.
VIX: Moving Sideways
On the previous Friday, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. However, a stock rebound on Wednesday pushed the VIX lower, and by Friday, it was down to 16.23.
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 Breaking Higher
Let’s take a look at the hourly chart of the S&P 500 futures contract (December series). The market is trading above 5,700, although it’s only gaining 0.3%. The support level is at 5,680-5,700.
Conclusion
The S&P 500 is likely to open slightly higher this morning and may attempt to reach or break its July record high. Sentiment remains very strong ahead of tomorrow’s Fed rate decision. However, despite the absence of clear negative signals, profit-taking seems likely at some point.
I opened a speculative short position in the S&P 500 futures contract yesterday.
In my Stock Price Forecast for September 2024, I noted that, “the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. (…) sharp reversal suggests more volatility in September. Last month, I wrote that ‘August is beginning on a very bearish note, but the market may find a local bottom at some point.’ The same could be said today, and September will likely not be entirely bearish for stocks.”
For now, my short-term outlook is bearish.
Here’s the breakdown:
- The S&P 500 is approaching its mid-July record high as sentiment improves ahead of the Fed's announcement.
- Investors await tomorrow's FOMC rate decision.
- In my opinion, the short-term outlook is bearish.
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Thank you.
Paul Rejczak,
Stock Trading Strategist