S&P 500: Failed rebound led to another decline

Stocks sold off yesterday despite positive expectations before the opening of the trading session, with the S&P 500 index closing the day 1.20% lower, and 1.7% below its opening price. The Middle East tensions took over once again as markets feared Israeli retaliation.

In my Stock Price Forecast for April, I noted, “Closing the month of March with a gain of 3.1%, the question arises: Will the S&P 500 further extend the bull market in April, or is a downward correction on the horizon? From a contrarian standpoint, such a correction seems likely, but the overall trend remains bullish.”

Last week, the investor sentiment slightly worsened again, as indicated by the AAII Investor Sentiment Survey from Wednesday, which showed that 43.4% of individual investors are bullish, while 24.0% 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.

Today, stocks are likely to rebound slightly, with the futures contract trading 0.2% higher at the moment. The S&P 500 will remain below the 5,100 level. In early April, the index broke its two-month-long upward trend line, as we can see on the daily chart.

Nasdaq 100 broke previous lows

The technology-focused Nasdaq 100 index lost 1.65% yesterday, following its Friday’s 1.7% decline. It caught up with the weakness of the broader stock market, breaking the local lows from February and March. Nasdaq 100 was the lowest since mid-February yesterday. However, it still looks like a consolidation following a medium-term advance.

VIX Above 19

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, recent market volatility has led to an increase in the VIX. On Friday, it surpassed 19, before closing around 17.50, and yesterday, it closed above 19, indicating a growing fear amongst investors.

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.

Futures contract trying to rebound from new local low

Let’s take a look at the hourly chart of the S&P 500 futures contract. This morning, it’s rebounding slightly from a new local low of around 5,080. The support level is at 5,080-5,100. The market has been in a slight downtrend since the start of the month, and yesterday, it accelerated the move.

Conclusion

The S&P 500 index accelerated its downtrend yesterday, extending a correction from the March 28 record high of 5,264.85. Investors’ sentiment worsened on Middle East tensions, strong U.S. dollar. Today, the market may see slight rebound or fluctuations, but a sudden sentiment improvement is unlikely. Yesterday, I questioned whether the correction was over – it appeared probable, but I was wrong as the intraday breakdown indicated a more significant correction underway. Thus, it's prudent to adopt a defensive approach and refrain from attempting to buy the dips in the near future.

On April 2, I wrote that “In April, we will see a usual series of important economic data, but with the Fed leaning towards easing monetary policy, we should perhaps pay more attention to the quarterly earnings season. However, good earnings may be met with a profit-taking action this time. The market appears to be getting closer to a correction.”

Then, I added: “It appears that profit-taking is happening. Is this a new downtrend? Likely not, however, a correction towards 5,000-5,100 is possible at some point.”

For now, my short-term outlook remains neutral.

Here’s the breakdown:

• The S&P 500 is likely to fluctuate following Friday’s-Monday’s sell-off.

• Stock prices are the lowest since late February, indicating a correction of the medium-term advance.

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

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