Stocks sold off, but will they break below previous lows?
Tuesday’s trading session ended on a negative note, with the S&P 500 closing 1.11% lower. The market reacted to economic data, including stronger-than-expected ISM Services PMI and JOLTS Job Openings figures. This morning, the S&P 500 is expected to open 0.1% lower following additional economic data.
On December 9, 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.” The sharp decline following the Fed’s release confirmed that the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment has worsened last week, as shown by the Wednesday’s AAII Investor Sentiment Survey, which reported that 35.4% of individual investors are bullish, while 34.2% of them are bearish.
The S&P 500 index remains within a month-long consolidation, as we can see on the daily chart.
Nasdaq 100: Bigger Pullback
The Nasdaq 100 index lost 1.79% yesterday, giving back gains from its Friday and Monday rebound. The advance has been fueled by META and NVDA stocks, and yesterday, NVDA hit a new record high before reversing sharply, closing 6.22% lower after an 8.6% intraday drop. This morning, the Nasdaq 100 is expected to open flat.
Further fluctuations are likely following November - December rally.
VIX: Volatility Rises Again
On December 18, the VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. It confirmed heightened fear in the market as stocks sold off. Then, the VIX dropped below 15 in late December. Yesterday, it hit a daily high of 18.90, signaling increased fear again.
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 Contract: Below 6,000 Again
This morning, the S&P 500 futures contract is trading near the 5,950 level after rebounding from an overnight low of 5,927. Key support is at 5,880-5,900, marked by the previous lows, while resistance is at 5,980-6,000, the previous support level.
The market seems poised for further consolidation.
Conclusion
Today’s market open is expected to be neutral following Tuesday’s pullback. Yesterday’s sharp declines, led by NVDA’s decline, have heightened uncertainty. This morning’s economic data caused a rebound but largely extended a consolidation that followed yesterday’s intraday sell-off.
On Monday, in my Stock Price Forecast for January 2025, I wrote that “the stock market is poised for continued fluctuations following the post-election rally in November. Although the S&P 500 dipped by 2.5% last month, this appears to be just a correction of November’s gains.
Will the market resume its uptrend and reach new record highs? This appears likely at some point, driven by growing optimism ahead of Trump’s upcoming inauguration on January 20. However, rallies may provide selling opportunities, leading to a medium-term consolidation phase.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 is likely to fluctuate after yesterday’s weakness.
- The stock 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