Will stock prices correct their rally? Mixed signals from the market.

Friday’s trading session is likely to open lower, with the S&P 500 index expected to dip by 0.6% following Wednesday’s record-breaking rally and Thursday’s consolidation. Yesterday, the index gained 0.23%, remaining close to its new record high of 5,447.25, which was reached on Wednesday after a lower-than-expected CPI reading.

In my forecast for June, I wrote “For the last three months, the S&P 500 index has been fluctuating along new record highs, above the 5,000 level which was broken in February. It looks like a consolidation within a long-term uptrend, but it may also be a topping pattern before some meaningful medium-term correction. What is it likely to do? As the saying goes, 'the trend is your friend', so the most likely scenario is more advances in the future.

However, a negative signal would be a breakdown below the 5,000 level. That would raise the question of a deeper correction and downward reversal. I think that the likelihood of a bullish scenario is 60/40 - a downward reversal cannot be completely ruled out. The market will be waiting for more signals from the Fed about potential interest rate easing, plus, at the end of the month, the coming earnings season may dictate the market moves.”

Investor sentiment much improved, as indicated by the AAII Investor Sentiment Survey on Wednesday, which showed that 44.6% of individual investors are bullish, while 25.7% of them are bearish (down from last week's reading of 32.0%). 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 remained above the 5,400 level yesterday, as we can see on the daily chart.

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Nasdaq 100 Reached New Record

The technology-focused Nasdaq 100 index reached a new record high of 19,639.45 yesterday and closed 0.57% higher. It extended its record-breaking rally following economic data and new record highs in AAPL, MSFT, and NVDA stocks. This morning, it is likely to open just 0.2% lower.

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VIX Below 12

The VIX index, also known as the fear gauge, is derived from option prices. In late May, it set a new medium-term low of 11.52 before rebounding up to around 15 on correction worries. Last week, the VIX came back towards 12, and yesterday, it was as low as 11.88, signaling even less 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.

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Futures Contract: Short-Term Consolidation

Let’s take a look at the hourly chart of the S&P 500 futures contract. The new series (September) is extending a consolidation along the 5,500 level. For now, it looks like a relatively flat correction of the uptrend. The resistance level is at 5,520, and the support level is at 5,450.

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Conclusion

Where will the market go following the record-breaking rally? The most obvious answer would be a correction of the advance and a retracement of the move from around 5,350 to around 5,450. However, a potential retreat could spark a new wave of demand, thus extending consolidation along new record highs. More pronounced profit-taking action may be coming at some point. Nevertheless, the market is still trading within an uptrend.

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