Stocks: Sentiment improves, but market may continue sideways

Stocks retraced more of their recent advances on Friday, with the S&P 500 index dropping by 0.65%. However, the market basically extended its short-term consolidation above the 5,100 level, and below the previous Friday’s new record high of 5,189.26.

The question remains: will stocks break higher and reach new all-time highs? This morning, the S&P 500 futures contract is trading 0.8% higher, indicating a higher opening for the index today. The market is reacting to the news that Apple may utilize Google's AI in their phones.

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 recently, it was the same story again. However, on previous Friday, a much more pronounced profit-taking occurred. Last week, the S&P 500 went closer to its record high once more, only to retreat towards 5,100 on Friday.

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 previous week’s new record, this still holds true. Nevertheless, such volatility complicates short-term market predictions.

The investor sentiment remains elevated; last Wednesday’s AAII Investor Sentiment Survey showed that 45.9% of individual investors are bullish, while only 21.9% 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 index is still trading above an over month-long upward trend line, as we can see on the daily chart.

S&P 500: Unchanged week to week again

Compared to the previous Friday’s closing price, the index lost 0.13%, and the previous week, it lost 0.26%. So, the market keeps extending a consolidation along new record highs. Once again, the weekly bar indicates uncertainty, suggesting the market may be topping, though no clearly negative signals are evident yet.

Nasdaq 100 was relatively weaker

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. On Friday, the market broke below previous local lows, closing 1.15% lower. However, this morning’s news regarding Apple and Alphabet is expected to lift the technology sector higher.

VIX bounced from 15.50

The VIX index, also known as the fear gauge, is derived from option prices. On Friday, it was as high as 15.50; however, before the close, it dipped below 14.50, suggesting less 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 gets back above 5,200

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it dropped below the 5,200 level, but this morning, it’s trading above that level again. The support level is at 5,200-5,220. It still looks like a consolidation within an uptrend.

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 reaching above the 18,000.

Today, the S&P 500 index is likely to open 0.8% higher on positive news from the AI sector. On March 5, I wrote that “The most likely scenario is an extended consolidation at some point, as not all stocks are participating in the rally, and it's driven by a handful of AI-connected ones.” Despite the recent record-breaking advance, it remains a probable scenario.

It’s worth noting, that the markets will be eagerly awaiting the FOMC Rate Decision release on Wednesday.

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 is likely to reclaim its last week’s losses following positive news from the technology stocks.

• It still appears to be consolidating within an uptrend.

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

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