Stocks eked out a gain on Tuesday, but looking under the hood reveals a much more optimistic picture.
The Dow Jones Industrial Average rose 60.00 points, or 0.19%, to close at 31,068.69. The S&P 500 rose 1.58 points, or 0.04%, to end at 3,801.19, and the Nasdaq Composite rose 36.00 points, or 0.28%, to close at 13,072.43. The biggest gainer in the S&P 500 was Occidental Petroleum (ticker: OXY), an energy company recently replaced in the S&P 100 by Tesla (TSLA), that saw shares zoom 13%. Oil had a great day, with the price of crude oil rising 1.7% to $53.14 a barrel. Other small oil names soared, with Apache (APA) stock surging 11%.
Investor sentiment is much better than the major indexes indicated.
First off, the reason the S&P 500 couldn’t gain any traction was because some of its biggest components— Microsoft (MSFT), Facebook (FB), Apple, and Google parent Alphabet (GOOGL)—spent much of the day in the red. The index is weighted by market capitalization, so these companies, including a trio valued at $1 trillion-plus, have tremendous pull on the index.
However, market breadth—or a rally in stocks across multiple sectors rather than a concentrated rally—was strong. The Invesco S&P 500 Equal Weght ETF (RSP) ended the day up 0.8% and by midday Tuesday, the ratio of advancing to declining stocks on the New York Stock Exchange was 3-1, according to data from Gorilla Trades.
Cyclical sectors, or those highly impacted by perceived changes in the economy, had a strong day. The Energy Select Sector SPDR Fund (XLE) surged 3.5%, the Industrial Select Sector SPDR Fund (XLI) gained 1%, and the SPDR S&P Bank ETF (KBE) rose 1.5%.
Investor optimism now rests more fiscal stimulus—in addition to the $900 billion on the way—which can further boost consumer spending. Bulls also hope for billions of doses of Covid-19 vaccines to be distributed throughout the year, which would reopen the economy and potentially catalyze the unleashing of that spend. But stocks have risen significantly of late even though they are trading at lofty levels, not an unheard-of dynamic.
With the absence of any major or macro developments to move stocks ahead Monday, TD Ameritrade’s chief market strategist offered some explanation. “People are anticipating a good earnings season and the market is overall kind of ignoring the Washington drama,” J.J. Kinahan wrote in a blog post.
Just watch out; elevated bullishness can sometimes portend weakness.
Write to Jacob Sonenshine at email@example.com