Optimism around the arrival of the Biden administration and COVID-19 vaccination, coupled with a good start to fourth-quarter results, helped the main US stock index hit a new high in January. But,With the market correction at the end of the month, market caution is on the rise.JJ Kinahan, chief market strategist at TD Ameritrade, believes the real test may come in February.

Kinahan said corporate earnings and data released in February would shed further light on the extent to which the US economy recovered from a deep downturn. Whether the Fed's current ultra-loose monetary policy stance will show signs of loosening, as well as the new government's fiscal stimulus and vaccination progress also need to be closely monitored. In addition, U. S. stocks may also face seasonal disadvantages.

Seasonal weakness followed by a pullback?

Us stocks experienced a correction this week amid a short-selling frenzy among retail investors, just days after the main stock index hit an all-time high.

Wednesday (January 27)The three major indexes of u.s. stocks all fell more than 2%, the worst one-day performance in three months.The Chicago Board options Exchange volatility Index (VIX), known as the "panic index", jumped nearly 62%, the third largest one-day gain since 1990. The s & p 500 is down 1.4% so far this week.

Some analysts pointed out that retail investors continued to buy shares such as video game retailer GameStop and cinema operator AMC Entertainment Holdings, forcing short sellers to surrender and accept losses. To cover short positions.These short sellers put pressure on the market by selling long positions in other stocks to raise money. It is not known when the air-clogging war will end.

Even before the sell-off, VIX futures contracts were trading at the top end of the 20-30 range, even if the index was at the low end of that range, Kinahan said. During the stock market decline, the distal end of the VIX futures curve broke through 30. Given that the historical average of VIX is 20, investors seem to be pricing more difficult times ahead.

At the same time, high valuations have added to fears that the stock market is shaky.

In late January, the forward price-to-earnings ratio of the S & P 500 was 24, compared with a long-term average of about 16, according to research firm CFRA. The discretionary consumer goods and information technology sectors have the highest price-to-earnings ratios and may be more vulnerable to valuation-related concerns, Kinahan said.

Seasonally, according to Kinahan,Us stocks have fallen in February over the past three years.

In addition, according to Ryan Detrick, a market strategist at LPL Financial, data since 1950 show that US stocks tend to weaken after the inauguration of a new US president, and this momentum will even last until March.

Semi-annual testimony of the Chairman of the Federal Reserve and Treasury yields

Another risk for U. S. stocks is a rise in Treasury yields, which could depress earnings expectations.

The yield on the benchmark 10-year Treasury note soared to nearly 1.2 per cent in just a few weeks from less than 0.9 per cent at the end of last year and has since fallen back and is now around 1.05 per cent.

Kinahan said it was almost a tug-of-war between the Fed and optimistic investors. The Fed still buys a lot of bonds every month, even if investors start selling 10-year Treasuries. This has helped the yield curve reach its highest level since 2017, a very positive development for the financial sector, where profits usually rise when the yield curve steepens.

"the question is whether the sawing will last. It seems obvious that the Fed is not going to let it go anytime soon. On the other hand, investors seem optimistic thatMore stimulus or prompting the government to borrow large amounts of new debt to raise funds, which could lead to an increase in the supply of longer-term bonds, pushing down prices and pushing up yields. "

Kinahan believes investors may want to keep an eye on the auction of U.S. Government bonds in February. If the market shows a strong interest in long-term government bonds, it may imply that there is not much room for yields to rise, and vice versa. The direction of yields could have a huge impact on the performance of large growth stocks, which are more sensitive to rising borrowing costs.

He also pointed out that although it is not yet on the calendar, the Fed chairman traditionally gives a semi-annual testimony report to Congress in February (usually around the middle of the month) to be questioned about economic and monetary policy. At that time, investors are expected to hear more from Federal Reserve Chairman Powell on bond purchases.

Kinahan saidSo far, there is no sign that Powell intends to suggest a loosening of the pace of bond purchases.And many analysts don't think this will happen until 2022, but the rebound is more solid than many analysts or even the Fed expected, so some investors have recently begun to worry about inflation.

The earnings season continues.

After some US companies released their results in January, there are still a large number of company results to be disclosed in February.

Kinahan said that affected by the COVID-19 epidemic, the performance of COVID-19 vaccine manufacturers such as Pfizer Inc and Modena will receive a lot of attention. Results from key companies such as UPS help investors understand consumer spending during the holiday season.Large retailers will gather in the last two weeks of February to release earnings reports, including Walmart Inc, Target Corp and The Home Depot Inc.

Us retail sales figures for January, released on February 17th, may show consumption more clearly. Kinahan pointed out that many people are burdened with debt after a spending spree during the holiday season, which may dampen January spending. Us retail sales fell for three consecutive months in October, November and December last year.

In addition, Deere, General Motors Co, Grace, Illinois tools and other large manufacturing enterprises will also release results in February, or have some implications for the industrial economy.