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S&P 500: Are We Already in the Euphoria Phase?

Published 07/08/2024, 09:05 AM
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Friday brought another record-breaking advance for the S&P 500 index as it closed 0.54% higher after reaching a new all-time high of 5,570.33. The stock market is in full bull-run mode ahead of some important data and the quarterly earnings season. But is it going to make more new highs in the coming week?

The S&P 500 opened virtually flat on Monday following last week’s advances, and it may see short-term uncertainty and possibly consolidation or a flat correction of the uptrend.

As I mentioned in my stock price forecast for July,

“While more advances remain likely, the likelihood of a deeper downward correction also rises. Overall, there have been no confirmed negative signals so far, but the May gain of 4.8% and June gain of 3.5% suggest a more cautionary approach for July (…) The market will be waiting for the quarterly earnings season in the second half of the month. Plus, there will be a series of economic data, including the CPI release on July 11, the Advance GDP number on July 25, and the FOMC Rate Decision on July 31.”

Investor sentiment slightly decreased last week, as indicated by Wednesday's AAII Investor Sentiment Survey. It showed that 41.7% of individual investors are bullish, while 26.1% 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 broke above its two-week-long trading range last Wednesday, as seen on the daily chart.SPX-Daily Chart

S&P 500: Almost 2% Higher Last Week

Compared to the previous Friday’s closing price, the index gained 1.95%, breaking above its short-term consolidation and reaching new records. The important support level is now at 5,450–5,500, marked by recent fluctuations.

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.”

SPX-Weekly Chart

Nasdaq 100: New Records

On Friday, the technology-focused Nasdaq 100 index reached a new record high of 20,406.99 and closed 1.02% higher on new records in Apple, Alphabet, Meta Platforms, and Microsoft stocks, among others.

Recently I kept repeating that the recent trading range still appeared to be just a flat correction of the uptrend, and it proved accurate. This morning, the Nasdaq 100 is expected to open 0.1% higher. There are short-term overbought conditions, and the market is likely to top at some point.NDX-Daily Chart

VIX Remains Relatively Low

The VIX index, also known as the fear gauge, is derived from option prices. Recently, it has been hovering around the 12 level, which historically is relatively low, indicating low 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.VIX-Daily Chart

Futures Contract Remains Close to Record High

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s trading flat, however, very close to a record high. The support level is now at around 5,600, marked by recent highs.S&P 500 Futures-1-Hour Chart

Conclusion

The S&P 500 index accelerated its uptrend last week, as it gained almost 2% vs. the previous Friday’s closing price. Today, it’s likely to open virtually flat in anticipation of tomorrow’s testimony from Fed Chair Powell and the important Consumer Price Index release on Thursday.

Despite last week’s optimism, there is uncertainty about a possible correction amid further economic data and earnings releases. The risk of a downward correction is increasing.

Quoting my last Monday’s stock price forecast for July,

“Investors continue pricing in the Fed’s monetary policy easing that is supposed to happen this year. Hence, a medium-term downward reversal still seems a less likely scenario. However, the recent record-breaking rally may be a cause for some short-term concern as a downward correction may be coming.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

  • The S&P 500 reached a new record high on Friday; this morning, it is likely to fluctuate.
  • Investors are waiting for important data this week and the coming quarterly earnings season.

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

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