Stocks uncertain ahead of CPI data and Fed decision

Stocks extended their short-term downtrend on Friday, with the S&P 500 index closing 1.73% lower after reaching a local low of 5,402.62. The market reacted to lower-than-expected monthly jobs data, among other factors. However, this morning, the index is likely to open 0.6% higher on improving investor sentiment ahead of the important CPI data on Wednesday and the FOMC Rate Decision next week.

My speculative short position in the S&P 500 futures contract from August 20, became more profitable on Friday.

On August 21, I wrote “Recently, the market has continued to climb following the brief Yen crisis at the start of August, surprising many traders. The question is whether the market will continue to new highs or reverse course and retrace the recent rally. I think there is a chance the market will reverse its course and correct some of the advances, retracing a large part of the rally.”

Despite recent declines, investor sentiment remained elevated, as shown by the AAII Investor Sentiment Survey last Wednesday, which reported that 45.3% of individual investors are bullish, while 24.9% of them are bearish, down from 27.0% last week.

The S&P 500 index retraced more of its August rebound on Friday, as we can see on the daily chart.

S&P 500 selling off by over 4% last week

Compared to the previous Friday’s closing price, the S&P 500 lost 4.25% last week, after gaining just 0.2% the previous week. This formed a topping pattern just below its mid-July record high. Last Tuesday, I wrote “In the short term, the market may be nearing a downward correction, but overall, the medium-term outlook remains bullish.” This proved correct, and I still think the recent decline is just a downward correction, likely part of a medium-term consolidation that started after the mid-July record high.

Nasdaq 100 extended its sell-off

The technology-focused Nasdaq 100 lost 2.69% on Friday, accelerating its short-term downtrend after the monthly jobs data release. It fell below the 18,500 level, retracing more than half of its August rebound. Potential support is at 18,200, marked by previous fluctuations. Today, the Nasdaq 100 is likely to open 0.7% higher, rebounding after Friday’s rout.

VIX: Above 22

On Friday, the VIX index, a measure of market fear, reached a local high of 23.76, slightly surpassing its Wednesday’s local high. It still indicates elevated fear among investors.

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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.

Futures contract: Change of trend or just rebound?

Let’s take a look at the hourly chart of the S&P 500 futures contract. On Friday, it briefly fell below the 5,400 level, extending its declines. This morning, the market is rebounding, though it seems to be losing steam ahead of the cash market open. Resistance is around 5,480–5,500, while support remains at 5,400.

Conclusion

The S&P 500 index sold off on Friday as investor sentiment dipped ahead of the weekend, fueled by the monthly jobs data release. Was it a final low before an upward reversal? For now, it looks like a correction of the uptrend, but with important data releases this week and the Fed's decision next week, the market may be entering a consolidation phase, potentially forming a short-term bottoming pattern here.

Last Wednesday, in my Stock Price Forecast for September 2024, I noted that, “the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. (…) sharp reversal suggests more volatility in September. Last month, I wrote that ‘August is beginning on a very bearish note, but the market may find a local bottom at some point.’ The same could be said today, and September will likely not be entirely bearish for stocks.”

For now, my short-term outlook is neutral.

Here’s the breakdown:

• The S&P 500 index dipped to around 5,400 on Friday; the market may go sideways from here.

• Investors are eagerly awaiting CPI data on Wednesday and the FOMC Rate Decision next week.

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

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