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US Stock Market Analysis: No Correction Yet?

By:
Paul Rejczak
Published: May 28, 2024, 12:58 GMT+00:00

Key Points:

  • The S&P 500 extended its short-term consolidation despite Thursday’s pull-back and a temporary fear factor for the market.
  • On Friday, April 19, stock prices were the lowest since February, indicating a correction of the medium-term advance. Recently, the S&P 500 retraced all of its mid-April sell-off, reaching new record highs above 5,300.
  • In my opinion, the short-term outlook is neutral.
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In this article:

On Thursday, the market sold off after a higher open, despite NVDA stock rallying by over 9% following its earnings release.

On Friday, I asked “Is this a downward reversal or just quick profit-taking?” The market rebounded and retraced its Thursday daily loss of 0.7%, so there is still a chance that it is only a flat correction and a consolidation within an uptrend.

This morning, the S&P 500 index is likely to open 0.1% higher, as indicated by futures contracts after the long holiday weekend in the U.S. The market may see some more uncertainty as investors await the important CB Consumer Confidence release at 10:00 a.m.

Investor sentiment improved, as indicated by the last Wednesday’s AAII Investor Sentiment Survey, which showed that 47.0% of individual investors are bullish, while 26.3% 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 broke its upward trend line last week, as we can see on the daily chart.

Stocks: No Correction Yet? - Image 1

S&P 500 Ended Week Unchanged

Compared to the previous Friday’s closing price, the index gained just 0.03%, extending a consolidation along its new record high of 5,341.88.

Quoting an article from May 13: “The recent price action confirmed the importance of the 5,000 level as a medium-term support. It’s hard to say whether the market will continue its long-term uptrend; however, it will most likely remain above 5,000 in the coming weeks or months.”

Stocks: No Correction Yet? - Image 2

Nasdaq 100 – Relatively Stronger

On Thursday, the technology-focused Nasdaq 100 index reached a new record high of 18,907.54 before closing 0.44% lower. It seemed that a more pronounced profit-taking action was coming; however, Friday’s trading session closed 1.0% higher as the NVDA stock rally pushed the Nasdaq 100 back above the 18,800 level. Today, the Nasdaq 100 is likely to open 0.3% higher, outpacing the broader stock market again.

Stocks: No Correction Yet? - Image 3

VIX Dipped Below 12 Again

The VIX index, also known as the fear gauge, is derived from option prices. In late March, it was trading around the 13 level. However, market volatility led to an increase in the VIX, and on April 19, it reached a local high of 21.4 – the highest since late October, signaling fear in the market. Recently, it was going lower again, and on Thursday, it was the lowest since November of 2019 at 11.52, before going above the 13 level. On Friday, it closed slightly below 12 following a rebound in stock prices.

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.

Stocks: No Correction Yet? - Image 4

Futures Contract Trading Above 5,300

Let’s take a look at the hourly chart of the S&P 500 futures contract. Last Thursday, it pulled back from a new record high of around 5,368 and fell by almost 100 points. However, Friday saw a rebound and this morning, the market is trading along the 5,330 level, with the resistance at 5,350, and the support at 5,300, among others.

Stocks: No Correction Yet? - Image 6

Conclusion

Stock prices are likely to open slightly higher today, and the S&P 500 may extend its consolidation around the 5,300 level. Thursday’s trading session might have led to a deeper correction; however, on Friday, the stock market advanced on technology sector strength. Despite Thursday’s profit-taking, the overall weekly outcome has been relatively neutral, signaling a flat correction within the uptrend.

In my Stock Price Forecast for May, I noted “Where will the market go in May? There’s a popular saying: ‘Sell in May and go away,’ but statistics don’t consistently support such clear seasonal patterns or cycles. The safe bet for May is likely sideways trading, with investors digesting recent data suggesting that inflation may not be transitory, and the Fed could maintain its relatively tight monetary policy. However, economic data isn’t entirely negative, and strong earnings from companies may continue to fuel the bull market.”

For now, my short-term outlook remains neutral.

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About the Author

Paul Rejczakcontributor

Stock market strategist, who has been known for the quality of his technical and fundamental analysis since the late nineties.

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