Stocks sold off on Monday, but their direction will depend on earnings and economic data.
Monday's trading session saw sharp declines in stocks as the market reacted to two key developments: concerns over advancements in Chinese AI technology that could threaten U.S. companies and Friday’s actions by the Bank of Japan, which might trigger an unwinding of the yen carry trade.
The S&P 500 index opened much lower, reaching a daily low of 5,962.92, but closed well above that level, down 1.46% from Friday’s close. Today, the index is expected to open 0.3% higher, likely recovering more of Monday’s losses.
Investor sentiment had significantly improved last week, as shown by the Wednesday’s AAII Investor Sentiment Survey, which reported that 43.4% of individual investors are bullish, while 29.4% of them are bearish.
The S&P 500 index retraced its last week’s rally, as we can see on the daily chart.
Nasdaq 100 Sold Off by 3%
The Nasdaq 100 closed 2.97% lower, driven by a sell-off in NVDA and other major tech stocks. It is expected to open 0.2% higher today but may face volatility. Resistance is now around 21,500, while support remains at 20,800-21,000.
VIX Rebounded Above 20
The VIX index, a measure of market volatility, advanced to the daily high of 22.51 yesterday, the highest level since December 20. However, it retraced much of its advance as stock prices rebounded later in the day.
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.
S&P 500 Futures Contract Faces More Uncertainty After Selling Off
This morning, the S&P 500 futures contract is trading above 6,050 after rebounding from Monday’s local low of 5,948. The market keeps extending its consolidation, after pulling back from new highs last week. The support is at 5,950-6,000.
Conclusion
Stocks are likely to open slightly higher this morning following Monday’s sell-off and subsequent rebound. However, whether the downward correction is over remains uncertain as markets await key economic data, including tomorrow’s FOMC release tomorrow, and several important earnings reports: ASML, META, MSFT, TSLA tomorrow, and AAPL on Thursday, among others.
On January 6, in my Stock Price Forecast for January 2025, I wrote that “the stock market is poised for continued fluctuations following the post-election rally in November. Although the S&P 500 dipped by 2.5% last month, this appears to be just a correction of November’s gains.
Will the market resume its uptrend and reach new record highs? This appears likely at some point, driven by growing optimism ahead of Trump’s upcoming inauguration on January 20. However, rallies may provide selling opportunities, leading to a medium-term consolidation phase.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 retraced recent gains on Monday; further uncertainty could lie ahead.
- The stock market is still seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Paul Rejczak,
Stock Trading Strategist