S&P 500 drops back from record high levels, eyes test of support in the 3820s

• The S&P 500 trades a little lower on Friday amid a more cautious tone the market’s broader appetite for risk
• To the downside, technical analysts note solid support in the 3820s.

The S&P 500 trades a little lower on Friday amid a more cautious tone the market’s broader appetite for risk; not only are US stocks lower, but European bourses closed in the red, commodities and risk-sensitive currencies mostly trade in the red and safe-haven currencies and bond markets are seeing demand. It seems as though, with US equity markets hitting record-high levels over the last two days, traders are keen to book some profit ahead of a weekend that they might fear is at risk of delivering more bad news regarding the state of the global pandemic.

At present, the S&P 500 trades 0.3% lower around 3840, having risen 10 points from earlier lows following much better than expected US preliminary Markit PMI numbers for January. To the downside, technical analysts note solid support in the 3820s, which were the previous all-time high levels from earlier in the week/last week.

Driving the day

As noted, it looks as though, with major US bourses at all-time high levels, US equity traders are eager to book a little profit ahead of a weekend during which risks are tilted to the downside with regards to news on the state of the global pandemic; China is struggling to quash a small outbreak, with 100 cases per day still being reported, which is concerning given how soon the Lunar New Year holiday is and the potential for that to be a super spreader event. Meanwhile, Hong Kong is in lockdown, various European nations have tightened restrictions this week and seem to be eyeing up tougher travel restrictions which could come into force in the coming weeks and the UK government is talking about lockdowns dragging on into the summer (though the Covid-19 statistics there are improving).

Note that most still suspect that the worsening state of the pandemic in the immediate future is unlikely to be able to deliver a meaningful blow to sentiment or US equity markets given that markets are still optimistic that vaccines will bring the virus under control in time and the subsequent economic recovery will be vigorous. Meanwhile, the Fed continues to indicate that it will maintain its ultra-accommodative policy stance for the foreseeable future (including not tapering the pace of its asset purchase programme through 2021).

This might arguably be the key to the equity market’s ongoing success. Financial suppression from the Fed has pushed real yields on US government bonds so low that There Is No Alternative (TINA) to investing in the equity market if an investor wants some yield (i.e. dividend yield tends to be significantly higher than bond yields). As long as real rates stay low and TINA stays in play, equity markets are likely to remain robustly supported.

S&P 500 key levels