Can The Rally Continue? Investors Sentiment Bullish At 44.5%

We have seen the market making a recovery amidst negative bias, and S&P 500 has crossed the 5,500 level, is the market going to put the volatility we experience in the previous quarter behind?

The S&P 500 marked its third straight daily gain this week, and the benchmark index is now up just around 16% for the year. Should investors get their hopes for continued rally up?

In the first week of June, we saw the AAII at 39%, and that has since moved up showing that investors are getting more optimistic with the next 3 weeks of June having an average of 44.5%.

And we are seeing that pessimism turn around, with the pessimism has fell from 1st week of June from 32% to 28.3%, with week of 19 June showing the lowest 22.5%.

The American Association of Individual Investors' most recent sentiment survey showed that pessimism among investors about the short-term direction of the stock market fell for the three straight week before rising to 28.3% on last week of June while optimism was above 40% for the first time in over two months.

On 01 July, June ISM Manufacturing Index came in at 48.5% with consensus at 49.1% while the previous stand at 48.7%. The key takeaway from the report is that each component remained in a state of contraction -- except prices, which slowed from the prior month -- signaling a state of subdued activity for the manufacturing sector that fits with a slowing economy.

May Construction Spending came in -0.1% with consensus at 0.1% while previous was revised to 0.3% from -0.1%. The key takeaway from the report was the drag in private residential spending driven by a decline in new single-family construction at a time when overall housing inventory has been constrained due to a lack of inventory for existing homes.

June S&P Global US Manufacturing PMI reported with final at 51.6 and the previous at 51.7, representing a dip of 0.1.

02 July, Fed Chair acknowledged progress in reducing inflation but emphasized the need for more confidence in the trend. Speaking at the ECB Forum in Sintra, Portugal, Powell noted that the economic boom seen in the latter half of 2023 was unexpected and highlighted the ongoing efforts to manage inflation.

Following the comments from Fed Chair at the ECB Forum on Central Banking, together with JOLTS - Job Openings Report for May that showed an increase in openings to 8.140 million from a downwardly revised 7.919 million (from 8.059 million) in April.

S&P 500 surpassing 5,500 on 02 July with the mega caps outperformed by adding to gains in the afternoon session. The consumer discretionary sector also helped to push S&P 500 higher, with this sector the biggest winner on 02 July.

On 03 July, we are seeing information technology sector leading the pack with 1.48% gain, and consumer discretionary sector continue to stay in the positive with 0.32%.

In June, the VIX came back lower, it was as low as 12.11, signaling less fear in the market. We saw VIX at 12.08 despite the comment made by Fed Chair.

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.

While volatility will stick around as the markets continue to contend with major headwinds like slowing economic growth, tightening monetary policy, high inflation and rising interest rates, these headwinds are showing signs of lessening when we start the third quarter of 2024.

As these headwinds dissipate, investors will become increasingly comfortable with moving investment allocations back into the equity markets. With the manufacturing data released, it is showing signs that at supply chain issues are lessening.

For investors with a longer-term view, I believe they could feel more comfortable now while they add exposure to the equity market. But we need to understand that there is never all-clear signal from the markets.

So we still need to monitor, diversify and look out for quality assets investment, considering the risk of volatility creeping back.

On Wednesday (03 July), we saw the S&P 500 (+0.51%) and Nasdaq Composite (+0.88%) climbed further into record territory.

The S&P 500 index is likely to remain relatively close to its recently acquired highs; however, a profit-taking action cannot be ruled out at some point. The S&P 500 may extend fluctuations after the holiday.

Appreciate if you could share your thoughts in the comment section whether you think market would continue to provide the rally while showing negative bias.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.