Stock prices face more uncertainty ahead of key data

On Friday, the S&P 500 index reached a new record high of 5,111.06 before closing virtually flat. Yesterday, it retreated by 0.38%, slightly extending a short-term correction. While there have been no confirmed negative signals, 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 late last week's rally, this still holds true. Nevertheless, such volatility complicates short-term market predictions.

This morning, the market was rebounding from the overnight lows. However, the S&P 500 futures contract is pointing to a flat opening of the trading session. Investors are awaiting several important economic data releases. At 10:00 a.m. today, we will receive the CB Consumer Confidence report; tomorrow, the Preliminary GDP data; and on Thursday, the crucial Core PCE Price Index, among others.

The investor sentiment has improved a bit last week; Wednesday’s AAII Investor Sentiment Survey showed that 44.3% of individual investors are bullish, while 26.2% of them are bearish. 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 rallied on Thursday following the Nvidia quarterly earnings, but on Friday, it experienced more uncertainty and sideways trading action. Yesterday, it retreated from the 5,100 level. The index continues to trade above a month-long upward trend line, as we can see on the daily chart.

Nasdaq 100 going sideways

On Friday, the technology-focused Nasdaq 100 index reached a new all-time high at 18,091.62 - 50 points above the previous high from February 12. However, the market failed to remain above 18,000, and yesterday, it closed virtually flat.

After the last Wednesday's market close, Nvidia released its quarterly report, which was better-than-expected, and significant for the hot AI sector. This news triggered a substantial rally and marked a record increase in market capitalization for Nvidia, a company nearing the $2 trillion mark. On Friday, Nvidia's stock reached yet another new record; this morning, it is expected to open 0.1% lower.

VIX remains below 14

The VIX index, also known as the fear gauge, is derived from option prices. On Friday, it fell below the 14 level, and yesterday, it remained flat despite weakness in stocks. Nonetheless, it is still notably above its recent lows from November to February, indicating that the market fears a downward correction at some point.

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 below 5,100

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it reached a new record high of around 5,120, and this morning, it’s trading below the 5,100 level. It appears to be trading within a consolidation. The support level remains at 5,060, marked by the recent highs.

Conclusion

The recent trading action was very bullish, with some of the tech stocks rallying to new record highs, the S&P 500 index breaking above 5,100, and the Nasdaq 100 index testing the 18,000 mark. In my previous Tuesday's analysis, I noted that, “in the short term, the possibility of a downward correction cannot be overlooked. A quick glance at the chart reveals that the S&P 500 index has recently become more volatile.”. Indeed, the correction occurred pretty fast, with the inflation number contributing to the downturn. However, the market quickly retraced the decline in the following days, and last week, it rallied to a new record high on Nvidia news.

Yesterday, the index retraced some of its rally from late last week. It remains to be seen whether this retracement marks the top, at least in the short term.

The S&P is likely to open virtually flat today, extending a consolidation around the 5,050-5,100 level. The most likely scenario remains an extended consolidation, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.

For now, my short-term outlook remains neutral.

Here’s the breakdown:

• The S&P 500 is expected to continue consolidating after the recent rally.

• A longer consolidation phase may ensue, following an extended rally over the past months.

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

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