Are Stocks Overheating?

Stocks have extended their gains, but will the uptrend continue?Stock prices continued their uptrend on Friday, with the S&P 500 gaining 0.54% and breaking above the 5,600 level. The market is once again nearing its July 16 record high of 5,669.67. But will it continue upward? Today, the index is expected to open 0.1% lower as markets await the FOMC rate decision on Wednesday. In the short term, the market appears more and more overbought, making a correction likely at some point.Last week, the investor sentiment worsened, as shown by AAII Investor Sentiment Survey on Wednesday, which reported that 39.8% of individual investors are bullish, while 31.0% of them are bearish, up from 24.9% last week.The S&P 500 index is approaching its August local highs, as we can see on the daily chart.  S&P 500: +4% Last WeekCompared to the previous Friday’s close, the S&P 500 gained 4.02%, retracing nearly all of the prior week’s 4.3% decline.Last Monday, I wrote “I still think the recent decline is just a downward correction, likely part of a medium-term consolidation that started after the mid-July record high.” This was accurate, and the market could experience more volatility following the Fed’s update on Wednesday.  Nasdaq 100: Still Relatively WeakerThe technology-focused Nasdaq 100 gained 0.47% on Friday, extending its short-term uptrend. However, it remains relatively weaker, trading well below the local high from August 22 and far beneath the July 10 record high of 20,690.97. This morning, the Nasdaq 100 is expected to open 0.4% lower.  VIX: Continued DeclineOn the previous Friday, the VIX index, a measure of market fear, reached a local high of 23.76. It was indicating elevated fear among investors. Last Wednesday, the rebound in stocks pushed the VIX lower, and on Friday it closed below 17.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.  Futures Contract: Remaining Above 5,600Let’s take a look at the hourly chart of the S&P 500 futures contract. It continues to trade above the 5,600 level after last week’s rebound. The resistance remains between 5,630 and 5,650, marked by the previous consolidation.

Conclusion
The S&P 500 index is likely to open 0.1% lower this morning. The key question is: Is this the beginning of a new uptrend leading to a record high? For now, it seems more like a medium-term consolidation. Investors are waiting for the Fed’s policy update on Wednesday, and in my opinion, profit-taking is likely at some point.Last Monday I closed my profitable short position, at 5,462. This position, opened on August 20 at 5,626, generated a 164-point gain.S&P 500 “the market experienced significant volatility in August, with a roller-coaster ride that included a sell-off to the August 5 local low and a subsequent advance, leading to a consolidation near the record high. (…) sharp reversal suggests more volatility in September. S&P 500 ‘August is beginning on a very bearish note, but the market may find a local bottom at some point.’ The same could be said today, and September will likely not be entirely bearish for stocks.”For now, my short-term outlook is bearish.Here’s the breakdown:

The full version of today’s analysis – today’s Stock Trading Alert – is bigger than what you read above, and it includes the additional analysis of the Apple (AAPL) stock and the current S&P 500 futures contract position. I encourage you to subscribe and read the details today. Stocks Trading Alerts are also a part of our Diamond Package that includes Gold Trading Alerts and Oil Trading Alerts.And if you’re not yet on our free mailing list, I strongly encourage you to join it – you’ll stay up-to-date with our free analyses that will still put you ahead of 99% of investors that don’t have access to this information. Join our free stock newsletter today. More By This Author:Stocks: Uncertainty Following The ReboundStocks Uncertain Ahead Of CPI Data And Fed Decision More Uncertainty As Stock Market Awaits Economic Data