Stock market sentiment has improved, but is the trend changing?

Stock prices were rebounding on Friday, with the S&P 500 index closing 1.11% higher. However, it closed well below the daily high of 5,488.32, indicating consolidation rather than a change in the short-term trend. This morning, it may see another attempt at reversing the downtrend, as the S&P 500 is likely to open 0.6% higher.

On Friday, I noted “Is the market forming a bottom pattern? It might be, but given the clear downtrend, the recent fluctuations are likely just a consolidation before another leg lower. We’re awaiting crucial earnings data next week and the important FOMC Rate Decision on Wednesday.”

This week, the key quarterly earnings releases will be: AMD and MSFT tomorrow, META on Wednesday, and AMZN and AAPL on Thursday. They will likely influence market sentiment. Of course, the important FOMC release on Wednesday will likely be met with volatility too.

My speculative short position in S&P 500, opened on July 9 remains profitable.

Investor sentiment has worsened last week, as indicated by the Wednesday’s AAII Investor Sentiment Survey, which showed that 43.2% of individual investors are bullish, while 31.7% of them are bearish – up from 23.4% last week.

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.”

The S&P 500 index remained below the 5,500 level on Friday, as we can see on the daily chart.

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S&P 500 Loses Second Week in a Row

Compared to the previous Friday’s closing price, the index lost 0.83%, following its previous week’s decline of almost 2%.

On the previous Monday, I wrote that “there are signs that the market is getting ready for a correction or a consolidation” and it proved correct. The previous week’s retracement has been the beginning of a more pronounced correction. The index broke below its months-long upward trend line.

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Nasdaq 100: Fluctuating Along 19,000

The technology-focused Nasdaq 100 index retraced its Thursday decline on Friday, advancing by 1.03%. Last week, it led the market lower after earnings releases from GOOG and TSLA. This week, we will see key big-tech releases; they will likely lead to volatility and rebound attempts.

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VIX Pulling Back Below 17

The VIX index, a measure of market fear, has been hovering around the 12-13 level since May. On Thursday, it was as high as 19.36 following its recent advances, fueled by the decline in stock prices. On Friday, it pulled back to a local low of 16.37, indicating 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. Conversely, the higher the VIX, the higher the probability of the market’s upward reversal.

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Futures Contract: Closer to Local Highs

Let’s take a look at the hourly chart of the S&P 500 futures contract. The market is experiencing a lot of volatility following its recent decline. The market is experiencing a lot of volatility following its recent decline. On Thursday, it traded as low as 5,430, and on Friday, it was closer to 5,530 again. This morning, the contract is trading along 5,530. The resistance level is at 5,550, and the support remains at 5,480-5,500, among others.

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Conclusion

On Friday, I wrote: “This week’s sell-off raises questions: Was it just a correction? Or was it the beginning of a downtrend? Seasonal patterns suggest that the low is likely to happen in October, but the future does not always follow the past. For now, it looks like a downtrend, and in the short term, an upward correction may occur.”

With sentiment improvement this morning, one may conclude that the market may be changing its downward course, and at least an upward correction may be ahead of us. The earnings season is in full swing, and on Wednesday, we will get the FOMC release. The releases will likely lead to volatility, and maybe buying pressure for stocks.

My speculative short position in the S&P 500 futures contract, opened on July 9, remains profitable.

Quoting my 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 bearish.

Here’s the breakdown:

• The S&P 500 index has been experiencing a lot of volatility since Wednesday-Thursday.
• Investors are waiting for key quarterly earnings releases from big-techs this week, and the Fed release on Wednesday, among others.
• In my opinion, the short-term outlook is bearish.

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