The S&P 500 and Nasdaq saw a decline on Friday, even after recent gains. The drop became worse in the last two hours of trading on Wednesday, particularly when the market hit the 6,936 resistance level right after opening. The current market trends don’t indicate a bad year for stocks. While AI isn’t in a bubble, strong earnings could still drive up stock prices. The financial and retail markets are showing resilience, easing worries about a bear market or a recession.

Market Outlook for 2026

Market conditions are expected to shift, leading to a more cautious outlook for 2026 compared to recent years. A market correction is likely, but the year has just started. We saw major selling pressure at the end of the first week of the year, as traders locked in profits from last year’s gains. The S&P 500 dropped 1.5% on Friday after a remarkable 24% increase in 2025. This suggests that hedging against further losses is a smart move for the short term. In the upcoming weeks, traders should think about buying protective put options on major market indices like the SPX or QQQ. This strategy acts as a hedge if profit-taking continues after the early days of January. Keeping an eye on the VIX is also important, as it has risen to 14.5, indicating an increased demand for market protection.

Evaluating Market Strategies

However, being fully bearish would be a mistake since the fundamentals are strong. As we approach the Q4 2025 earnings season, projections for S&P 500 earnings growth are still around 11%. Thus, selling cash-secured puts at lower strike prices could be a good way to earn premiums while preparing to buy during a potential dip. We aren’t seeing the signs of a true bear market, especially since key sectors are resilient. The Financial Select Sector SPDR Fund (XLF) is still trading close to its 52-week high. Also, the strong retail sales data from December 2025, which showed a 0.8% increase, suggests consumers aren’t collapsing. This strength indicates that any major market drop would likely be limited. The focus on AI continues to support the market, with reasonable growth expectations for key players preventing a repeat of the tech collapse seen in 2022. Given that 2026 is expected to be a leaner year, using collar strategies on current long positions could be wise. This method protects your capital while generating income in what might be a sideways or mildly rising market. Create your live VT Markets account and start trading now.

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