Assessment of Market Position: (short-term, personal perspective; contract): Personally, the short-term market outlook appears neutral, and it may not justify any current trading positions based on risk and reward.
Uncertainty is prevailing in the market, despite the recent achievement of a new record high. The market’s upward trend is no longer as clear as it used to be. While the S&P 500 index established a new all-time high at 4,903.68, its closing gain was a mere 0.08%. Uncertainty is making it increasingly difficult to confidently predict the market direction. Those maintaining a bullish stance should consider the possibility of partially closing their positions.
Curiously, investor sentiment has slightly deteriorated once again, as evidenced by the latest AAII Investor Sentiment Survey. The survey revealed that 39.3% of individual investors are bullish, lower than the previous week, while the neutral reading increased to 34.6%. Historically, such bullish readings have indicated excessive complacency and a lack of fear in the market, potentially signaling a downturn. Conversely, bearish readings have often preceded market upswings.
Nevertheless, current investor sentiment remains historically bullish, particularly in anticipation of the upcoming quarterly earnings releases and the expected monetary policy easing by the Fed this year.
Last Friday, the stock prices broke above their month-long trading range, dismissing any potential medium-term topping pattern scenarios. As predicted on Monday, a short-term downward correction is expected due to the market becoming increasingly overbought. Despite reaching a new high, a correction scenario in the near term seems likely. The market’s rally from its Wednesday’s daily low of around 4,715, a nearly 190-point advance, may not conclusively mark the peak of a rally. Caution is warranted, as a correction or consolidation could materialize at any point.
The S&P 500 futures contract is currently trading 0.2% higher following yesterday’s Tesla quarterly earnings release. Despite Tesla’s pre-market decline of 9%, better-than-expected economic data has boosted market sentiment. Consequently, the S&P 500 index is expected to retrace some of its intraday decline from yesterday, subsequent to the release of more significant earnings reports post-market close, such as those from INTC.
Evidently, the market has retreated from the much-anticipated 4,900 level, as is apparent from the daily chart.
Nasdaq’s Relative Strength
Notably, the technology-focused Nasdaq Composite achieved a new all-time high at 17,665.26. The market is expected to open 0.3% higher this morning after the previous day’s intraday pullback. Despite Tesla’s pre-market 9% plunge, little significant market reaction is observed.
In early January, a vigorous rebound was witnessed, followed by another advance that closed above an important daily gap down of 16,687-16,758, denoting a positive signal. Consequently, it broke to new record highs last week. However, the current short-term overbought market condition suggests a potential correction in the offing.
VIX’s Recovery from Recent Lows
The VIX, commonly known as the fear gauge, is derived from option prices. On Thursday, it dropped below the 14.50 level, which served as a mark by previous local highs. Subsequently, it continued to descend in response to the rising stock prices. However, an almost 5% rebound was observed yesterday, stemming from the earlier local lows in the 12.00-12.50 range.
Historically, a declining VIX has indicated reduced market fear, while an ascending VIX has trailed stock market downturns. Nevertheless, an abating VIX also heightens the likelihood of an impending market reversal.
Apple (NASDAQ:) – Consolidation Below the Significant $200 Mark
Let’s shift focus to an individual stock – Apple, which is a pivotal market mover. In early January, it underwent a notable sell-off, signifying a shift in trend. On January 8, the market approached a potential support level of around $180, and the forecast of a potential rebound was validated. Subsequently, Apple broke above the resistance level of $188-190 last week. This week, it reached a probable resistance level of $195-200, where it is anticipated to consolidate as investors await the quarterly earnings release on February 1.
Futures Contract Trading Around 4,900
Let’s delve into the hourly chart of the S&P 500 futures contract. Presently, it is trading above the 4,900 level, retracting the previous day’s intraday rally to a new high of around 4,933. Currently, there are no confirmed negative signals. However, the market has become increasingly overbought in the short-term. The support level remains at 4,880-4,900, delineated by the recent consolidation.
Stocks: New Record Followed by Pullback, Is the Top In? – Image 5
Conclusion
The stock market is likely to open marginally higher this morning, buoyed by the impact of the previous day’s Tesla earnings release and today’s pivotal economic data. The Advance GDP number exceeded expectations, reporting +3.3% vs. the anticipated +2.0% q/q. Investor sentiment remains elevated in anticipation of the upcoming quarterly corporate earnings releases; however, a correction or consolidation may transpire at some juncture.
On December 21, it was asserted that “in the short-term the market may see some more uncertainty and volatility,” and indeed, substantial uncertainty followed the rally in early December and the S&P 500’s breakout above the 4,700 level. Nonetheless, last Friday’s price action dispelled any notion of a potential medium-term trend reversal. While the market is overbought in the short term, predicting a correction is considerably challenging at present.
As of now, the short-term outlook remains neutral. Trading positions may not be justified from a risk and reward perspective.
- The S&P 500 attained a fresh record high yesterday, albeit harboring near-term uncertainty.
- The breach of recent highs indicated a positive signal; however, the possibility of a retracement looms. The index may be approaching the zenith of a short-term uptrend.
- From my perspective, the short-term outlook is neutral, and no positions are warranted based on risk and reward considerations.