Stock Prices Hit Records, Key Data and Earnings Ahead

Trading position (short-term, my opinion; S&P 500 futures contract): In my opinion, the short-term outlook is neutral, and no positions are currently justified from the risk/reward point of view.

Monday’s trading was bullish, driven by the information released by the U.S. Treasury regarding a drop in the Q1 quarterly refunding estimate. This led to a rally in bond prices and falling yields, subsequently causing another rally in stocks.

However, despite reaching a new record, there is a lot more uncertainty in the market right now. Yesterday, the S&P 500 index set a new all-time high at the level of 4,929.31, around 0.5% higher than the Friday’s high. Nevertheless, speaking definitively about trend following is becoming more challenging, and those who remain bullish should consider at least partially closing positions.

Surprisingly, investor sentiment has slightly worsened once again last week – 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 new highs, it seems that a correction scenario is likely in the near term. The market rallied from its previous Wednesday’s daily low of around 4,715 – an advance of around 214 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 0.2% lower this morning, indicating a slightly lower to neutral opening of the S&P 500 index. Investors will be awaiting important earnings reports this week, including MSFT, GOOG, AMD today after the session’s close, and AAPL, AMZN, META on Thursday, among others. Additionally, tomorrow, the markets will get the highly anticipated Federal Funds Rate release from the Fed.

The market continues its uptrend, as we can see on the daily chart.

Nasdaq Falls Short of New Record

Last Wednesday, the technology-focused Nasdaq 100 index reached a new all-time high at the level of 17,665.26. Then, it traded mostly sideways in response to Intel’s quarterly earnings release, which caused the stock price to drop by almost 12%. Yesterday, it rebounded, coming back closer to all-time high.

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

VIX – More Consolidation

The VIX index, also known as the fear gauge, is derived from option prices. While it continues to trade sideways, there have been attempts at a breakout above the 15 level. Yesterday’s stock market rally pushed the VIX lower again.

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.

Apple Remains Weaker

Let’s move on to an individual stock – Apple, which is one of the most important market movers. In early January, it experienced a sharp sell-off. The decline has been significant, suggesting a change in trend. On January 8, I wrote that “(…) the stock approached a potential support level of around $180.” and “The market may see a rebound here.”. This prediction proved accurate; recently, Apple broke above the resistance level of $188-190. Last week, the market reached a potential resistance level of $195-200, where it began to consolidate as investors await the quarterly earnings release this Thursday.

Yesterday, Apple retraced some more of the recent advance, but it rebounded before the session’s close. The support level is now at around $190, marked by the previous resistance.

Futures Contract Retreats From Record High

Let’s take a look at the hourly chart of the S&P 500 futures contract. Yesterday, it reached a new record high at around 4,957. The market reacted to the mentioned U.S. Treasury release an hour before the cash market close. As of now, there are no confirmed negative signals; however, the market remains in the overbought territory. The support level is currently at around 4,920-4,930, marked by recent fluctuations.

Conclusion

The S&P 500 index is likely to retrace some of its last hour rally from yesterday this morning. There is increased uncertainty following the 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 tomorrow’s Fed release. However, a more pronounced downward correction may occur at some point.

Today, after the session’s close, we will receive key numbers from major companies like MSFT, GOOG, and AMD. Additionally, there will be important economic data releases, CB Consumer Confidence and JOLTS Job Openings, at 10:00 a.m.

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.

I think that no positions are justified from the risk/reward point of view.

Here’s the breakdown:

• The S&P 500 set new record high yesterday, extending Friday’s peak by 0.5%.
• While setting new records is very bullish, there is uncertainty about whether the market might retrace some of the rally. The index may be approaching the peak of a short-term uptrend.
• In my opinion, the short-term outlook is neutral, and no positions are justified from the risk/reward point of view.

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The full version of today’s analysis – today’s Stock Trading Alert – is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.