Stocks reversed sharply lower. Is this the start of a bigger correction?
The Fed’s rate decision and Jerome Powell’s press conference yesterday significantly impacted the stock market. The S&P 500 index sold off by 2.95%, closing below the 5,900 level and retracing its post-election rally.
Last Monday, I noted that “the S&P 500 index reached a new record high of 6,099.97 on Friday. The key question remains whether the uptrend will continue, despite signs of short-term overbought conditions.” Yesterday’s sharp decline confirmed the market was forming a topping pattern, as fluctuations led to a break lower.
Investor sentiment slightly worsened before the sell-off. as shown by the yesterday’s AAII Investor Sentiment Survey, which reported that 40.7% of individual investors are bullish, while 31.4% of them are bearish - a slight decrease from 31.7% last week.
The S&P 500 broke sharply lower yesterday, as we can see on the daily chart.
Nasdaq 100: Sharp Sell-Off
The Nasdaq 100 index sold off by 3.60% yesterday, retracing weeks of gains and returning to early November’s local highs. Although it is expected to open 0.6% higher today, this appears to be a rebound following yesterday’s decline.
VIX Rallied to New Highs
The VIX index, a measure of market volatility, surged to 28.32, its highest level since early August. It confirmed heightened fear in the market as stocks sold off.
On the previous Friday, it dropped to a new local low of 12.70, its lowest since early July.
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 Rebound Towards 6,000
This morning, the S&P 500 futures contract rebounded from yesterday’s local low of around 5,907. Key support remains at 5,900, with resistance at 6,000–6,050.
Conclusion
Stock prices are likely to open higher this morning, retracing some of their yesterday’s sell-off. There may be more short-term volatility following yesterday’s Powell’s speech.
Yesterday, I noted “A rotation within stocks continues, with some reaching record highs while recent leaders are lagging. Whether the market breaks higher after the Fed decision remains to be seen. Any breakout could lead to profit-taking, potentially extending a consolidation.” This has proven accurate, as the market has formed a topping pattern that broke lower yesterday.
Last Monday, in my Stock Price Forecast for December 2024, I wrote “the stock market experienced a strong rally in November, driven by the presidential election outcome. While December is historically a bullish month, increased volatility and a short-term correction remain likely.”
For now, my short-term outlook is neutral.
Here’s the breakdown:
- The S&P 500 has retraced its post-election rally.
- The market is seeing increased volatility following the post-election rally.
- In my opinion, the short-term outlook is neutral.
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Thank you.
Paul Rejczak,
Stock Trading Strategist