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Stock prices reached new record highs, but is there any gas left?
Yesterday’s FOMC Rate Decision release has been a game-changer for the stock market, at least for the short-term. The S&P 500 index has reached a new record high at the level of 5,226.19, gaining 0.89% and breaking a two-week-long trading range.
This morning, the S&P 500 futures contract is up by 0.5%, indicating a higher opening for the index. So, the market is likely to reach yet another new all-time high; however, the question is: will that surge lead to a short-term or intraday downward correction and a potential retracement of the advance? From a contrarian standpoint, it seems likely, but the overall trend remains to the upside.
On March 1, 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 yesterday, it was all about that Fed pivot, hence a positive market reaction.
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 the rally, this still holds true. The S&P 500 index seems to be crawling a wall of worry here.
Quite surprisingly, the investor sentiment worsened a bit; yesterday’s AAII Investor Sentiment Survey showed that 43.2% of individual investors are bullish, while 27.2% of them are bearish, up from 21.9% last week. 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 bounced from an over month-long upward trend line, as we can see on the daily chart.
Nasdaq 100 Without New Record
On March 8, the technology-focused Nasdaq 100 index reached a new record high of 18,416.73, however, it quickly retraced the advance, and since then, it has been trading sideways. Yesterday, it gained 1.15%, closing above the 18,200 level. It still looks like a consolidation following weeks-long uptrend.
VIX Dipped to 13
The VIX index, also known as the fear gauge, is derived from option prices. On Friday, it was as high as 15.50, and yesterday, it dipped to 13 following a rally after the Fed announcement. It clearly indicates a lack of fear in the market.
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 Above 5,300
Let’s take a look at the hourly chart of the S&P 500 futures contract. It broke above the recent trading range as markets reacted to the FOMC release. This morning it’s trading along the 5,300 level. The support level is now at 5,260, marked by the previous highs.
Conclusion
Today, the S&P 500 index is likely to open 0.5% higher following yesterday’s breakout and a record-breaking advance. However, some profit taking action may be in cards at some point. There have been no confirmed negative signals so far though.
In my Stock Price Forecast for March, I noted “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 reached a new record high on Fed news, and today, it will extend the advance.
- Stock prices are getting more overbought, and another short-term correction may be coming.
- In my opinion, the short-term outlook is neutral.
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