Last week, the S&P 500 recorded a loss of -1.6%. There was noticeable increased volatility in the market. The ups and downs throughout the week reflected investors’ uncertainty. Despite occasional periods of recovery, the downtrend continued. This sustained weakness could be attributed to still elevated inflation numbers coming from the US.
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Since the beginning of January, the S&P 500 has been within a trend channel defining a strong upward trend. A larger correction of 5-10% has been overdue for weeks and would only occur if the trend channel were to be breached downwards. Last week, the trend channel was indeed breached, signaling a potential end to the upward trend. This week, the trendline was tested from below, and the S&P 500 once again failed to return above it, confirming the trendline break. This development suggests that the market may have reached a turning point, signaling a phase of correction or even a trend reversal.
The macro environment remains negative, with various signals from the Risk Level Indicator (RLI) increasingly confirming this. My baseline scenario anticipates rising stock prices until the recession in the USA or a credit event in the spring of 2024. Particularly noteworthy is the Federal Reserve’s Bank Term Funding Program (BTFP), which was launched after last year’s banking crisis to assist banks facing difficulties due to high interest rates. This program has expired, and banks now must gradually repay the loans to the Fed over a year. The RLI will detect emerging issues in a timely manner and adjust the risk level accordingly. At the moment, a somewhat defensive allocation in stocks is recommended.
The world of finance is complex and includes many technical terms. For explanations of these terms, I recommend using the Investopedia dictionary.
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