Market Notebook

U.S. equities traded sharply lower on the week while bonds, as measured by the ticker BND, carved out the possible beginnings of a consolidation pattern.

Ticker SPY, representing the S&P 500, smashed through a theorized area of price support for short-term traders, associated with the early December lows mentioned in last week’s market notebook. Furthermore, SPY closed the week below the 200-day moving average. Such price action is potentially bearish for the S&P 500 over the short term.

The next area of technical price support for the S&P 500 is associated with the lows established around October 4th, 2021. SPY must remain above the October 4th lows and ideally close above the 200-day moving average for pricing optimism to return. There are some names in the beat-up tech sector that look interesting at these prices, for example, ADBE and AAPL. Unfortunately, the negative technical picture of the overall market makes it hard to enter new positions with confidence just yet.

Regarding the real economy, the Conference Board’s Leading Economic Index increased in December, suggesting a continued expansion of the U.S. economy into the first quarter of 2022. A bull case for equity prices in the first quarter can be made if the economy continues expanding, Omicron infections decline, and signs of peak inflation appear.

Volatility in the bond market continues, with BND in the early stages of possible consolidation. It is not at all clear as to whether bonds will consolidate here or move lower with continued inflation concerns. Continuing with an under-weighting bond strategy in most long-term portfolios seems prudent.

For long-only, long-term investors, a volatile start to the new year like we have had can be psychologically challenging. As has been said before, it may help to remember that volatility, corrections, and even bear markets are all part of the investing landscape and are expected features of markets. They are considered features and not bugs because pullbacks allow long investors to purchase desirable assets at relatively favorable prices. Now is the time to be on the lookout for such opportunities.

All the best.