January was a volatile month for indices. Sharp losses were seen throughout the month, with a maximum drawdown of almost -12.4% on the S&P 500 futures. However, recovery is now beginning to threaten as markets have rebounded in recent sessions. The sustainability of this move will be tested in the coming days with an overhead supply of stale bulls and willing sellers. 

  • A continued recovery for indices needs bond markets to stabilise and volatility to reduce.
  • S&P 500 futures are up into key resistance
  • NASDAQ has further to run in its recovery

Real yields falling back are helping indices find support

The sharp rise in real bond yields has been a key component of why indices fell sharply throughout much of January. However, in the past few sessions, there has been a notable pullback. Inflation expectations have ticked marginally higher, just as the 10 year Treasury yield has dropped back below 1.80% again. This has pulled “real” yields (bond yields minus inflation) lower.

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This move lower has allowed indices to recover in recent sessions. Most notably this is positive for the high growth NASDAQ. Lower bond yields reduce the opportunity cost of trading a low-yielding index of stocks (such as the NASDAQ).

Both the S&P 500 futures and NASDAQ have a consistent negative correlation with real yields. This relationship is running extremely strongly negative in 2022.

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NASDAQ has had a stronger average negative correlation in play since 2020. When real yields fall, this is positive for Wall Street.  

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How far can the Wall Street rebound go?

The January sell-off on Wall Street went a long way (S&P 500 -12.4%, NASDAQ -17.3%). However, as the recovery begins to set in, there is a debate around whether this is a buying opportunity. Within the scope of what we see as choppy trading ranges for indices in the coming months, we believe this weakness is a chance to buy, however, it could still be an element of timing.

The S&P 500 futures (MT5 code: SP500ft) have rebounded from a key floor around 4210. This effectively leaves a move between support at 4210 and resistance at 4807. The recent recovery has unwound into the mid-range key resistance band between 4492/4520. How the market reacts around here could be key. If real bond yields remain stable and/or continue to slide lower, then we would expect to see further recovery through 4520.

S&P futures

However, this resistance is a key area of medium term overhead supply now. Lots of old stale bulls would be sitting around here and could be potential sellers again. This is why it is important to clear this resistance.

The Relative Strength Index also needs to move above 50 to suggest there is a sustainable improvement to the outlook for momentum.

NASDAQ has further to go in its recovery

NASDAQ fell much more than the S&P 500 in January. However, if real yields continue to fall, then the recovery on NASDAQ will be much greater.

NASDAQ 100 futures (MT5 code: NAS100ft) have already moved through initial resistance at 14,400/14,640 (an area that is now supportive). The way is open towards 15,250 however, the key resistance remains the old key breakout area around 15,500/15,700. It would suggest that if the momentum continues to recover (with the RSI moving into the 50s) then there is plenty of scope for further gains.

NASDAQ 100 futures