S&P 500 going sideways amid earnings and Fed

There is a lot more uncertainty in the market right now, and despite reaching a new record, the uptrend is no longer as evident. On Friday, the S&P 500 index set a new all-time high at the level of 4,906.69 before retracing most of the advance and closing 0.07% lower. However, it's becoming more challenging to speak definitively about trend following, and if someone is still bullish, they should consider at least partially closing positions.

Surprisingly, investor sentiment has slightly worsened once again – last Wednesday’s AAII Investor Sentiment Survey showed that 39.3% of individual investors are bullish, lower than the previous week. Meanwhile, the neutral reading increased to 34.6%. 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.

Nevertheless, investor sentiment is still very bullish ahead of the upcoming quarterly earnings releases and the expected monetary policy easing by the Fed this year.

On the previous Friday, stock prices broke above their month-long trading range, invalidating any potential medium-term topping pattern scenarios. Last Monday, I wrote that “in the short term, one would expect some downward correction as the market becomes increasingly overbought”. Despite a new high, it seems that a correction scenario is likely in the near term. The market rallied from its last Wednesday’s daily low of around 4,715 – an advance of over 190 points. Of course, it's hard to tell if this marks the peak of a rally, but caution may be advised, as a correction or consolidation could occur at some point.

The S&P 500 futures contract is trading virtually flat this morning, indicating a flat opening of the S&P 500 index. Investors will be awaiting important earnings reports this week, including MSFT, GOOG, AMD tomorrow, and AAPL, AMZN, META on Thursday, among others. Additionally, on Wednesday, the markets will get the highly anticipated Federal Funds Rate release from the Fed.

The market continues to trade along the 4,900 level, as we can see on the daily chart.

Nasdaq was relatively weaker

Last Wednesday, the technology-focused Nasdaq 100 index reached a new all-time high at the level of 17,665.26. On Thursday, it traded sideways, but on Friday it declined by 0.55% following Intel's quarterly earnings release, and the stock price going down almost 12%.

In early January, the Nasdaq 100 bounced sharply, followed by another advance and closing above the important daily gap down of 16,687-16,758, which was a positive signal. Consequently, it broke to new record highs last week. However, a correction may occur at some point as the market is currently technically overbought in the short term.

VIX remains below 14

The VIX index, also known as the fear gauge, is derived from option prices. On the previous week, it came back below the 14.50 level, marked by the previous local highs. Subsequently, it continued its decline in response to advancing stock prices. Last Wednesday, it rebounded from the previous local lows in the 12.00-12.50 range, and on Friday it went lower again after bouncing down from 14.

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 extends consolidation

Let’s take a look at the hourly chart of the S&P 500 futures contract. Today, it’s trading above the 4,900 level again. There have been no confirmed negative signals so far; however, the market remains in the overbought territory. The support level is still at 4,880-4,900, marked by the recent consolidation.

Conclusion

The S&P 500 index is likely to further extend its consolidation. There is more uncertainty following recent rally and new record highs, but investor sentiment remains elevated ahead of this week's key quarterly corporate earnings releases, a series of economic data, and Wednesday’s Fed release. However, a more pronounced downward correction may occur at some point.

On December 21, I mentioned that “in a short-term the market may see some more uncertainty and volatility”, and indeed, there was a lot of uncertainty following the early-December rally and the breakout of the S&P 500 above the 4,700 level. However, the previous Friday’s price action left no illusions of a potential medium-term trend reversal. The market is overbought in the short term, but predicting a correction is currently very challenging.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

• The S&P 500 is further extending its consolidation along the new record high.

• The breakout above the recent highs marked a positive signal, it’s uncertain whether the market won’t retrace some of the rally. The index may be nearing the peak of a short-term uptrend.

• In my opinion, the short-term outlook is neutral.

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