The S&P 500 and Nasdaq experienced a decline on Friday, despite recent gains. The fall intensified towards the last two hours of trading on Wednesday, especially as the 6,936 resistance level was reached again soon after the market opened.
The current market trend does not suggest a poor year for equities. Though AI is not in a bubble, earnings remain strong, potentially boosting stock multiples. Current financial and retail markets display resilience, negating concerns of a bear market or recession.
Market Outlook for 2026
Market dynamics are expected to change, with a leaner outlook for 2026 compared to the previous years. Although a market correction is anticipated, the year has only just begun.
We saw significant selling pressure to end the first week of the year, driven by traders locking in gains from last year’s run-up. The S&P 500 shed 1.5% on Friday following the impressive 24% gain we saw during 2025. This move suggests that in the immediate short-term, hedging against further downside is a prudent first step.
For the coming weeks, derivative traders should consider buying protective put options on broad market indices like the SPX or QQQ. This strategy offers a direct hedge if this profit-taking continues past the initial days of January. Watching the VIX is also key, as it has ticked up to 14.5, suggesting a rising demand for market insurance.
Evaluating Market Strategies
However, going fully bearish would be a mistake, as fundamentals remain strong. As we head into the Q4 2025 earnings season, projections for S&P 500 earnings growth still sit around 11%. Therefore, selling cash-secured puts at lower strike prices could be an effective way to collect premium while setting up to buy a potential dip.
We are not seeing the signs of a true bear market, especially with key sectors showing resilience. The Financial Select Sector SPDR Fund (XLF) continues to trade near its 52-week high, and the strong December 2025 retail sales data, which showed a 0.8% increase, doesn’t point to a consumer collapse. This strength suggests any significant market drop would likely be limited.
The AI narrative also continues to be a powerful tailwind, with justified growth expectations for key players preventing a 2022-style tech collapse. Given the expectation that 2026 will be a leaner year, employing collar strategies on existing long positions could be wise. This approach protects capital while generating income in what might become a sideways-to-modestly-up market.
