Futures contracts tied to the major U.S. stock indexes rose early Tuesday after finishing strong last week.
Dow Jones Industrial Average futures climbed 200 points, while S&P 500 futures rose 0.6% and Nasdaq 100 futures gained 0.5%. The U.S. stock market was closed on Monday for President’s Day.
The Cboe Volatility Index, widely viewed as Wall Street’s best fear gauge, broke below 20 to settle at 19.97 on Friday, marking the first significant breach of the psychological threshold since the market sell-off began in February 2020.
The crack of the 20 level is viewed by some on Wall Street as a big “risk on” signal, which could trigger buying from algorithmic traders and other big players. The gauge last traded up about one point to 21 on Tuesday morning.
“Fear is receding from the market,” Tom Lee, FundStrat’s co-founder and head of research, said in a note on Friday. “And receding fear is followed by systematic and quant funds adding ‘leverage’ — in other words, this is a set-up to see a rally.”
The major averages finished last week with decent gains even as February’s rally appeared to cool off somewhat. The blue-chip Dow Jones Industrial Average posted two little changed days, while the S&P 500 swung within 0.2% for three days in a row.
Still, the S&P 500 finished the week with a gain of 1.2%, while the Dow added 1%. The tech-heavy Nasdaq Composite rose 1.7%. All three closed at record levels on Friday.
Easing fears across Wall Street are likely in large part thanks to the rollout of the Covid-19 vaccine, economic reopening and expectations for more fiscal stimulus.
“Covid is far from defeated, but the path toward economic normalization is clearer as more vaccines that reduce hospitalizations and eliminate fatalities are approved,” Dennis DeBusschere, strategist at Evercore ISI, said in an email.
“Treasury Secretary [Janet] Yellen’s forceful arguments for additional stimulus followed by Fed Chair [Jerome] Powell describing maximum employment as ‘our national goal’ helped lift bond yields, inflation expectations, and oil prices last week,” he added.
The Dow has gained 4.9% in February, while the S&P 500 and the Nasdaq have rallied 5.9% and 7.8%, respectively. The S&P 500 has raked in ten record closes in 2021.
Still, DeBusschere warned that rising interest rates and an uncertain policy outlook could keep trading from growing too frothy in the near term and recommended investors stick to cyclical stocks that could see the most upside as the U.S. economy recovers.
Those so-called cyclical sectors, those most sensitive to an economic rebound, have led the rally in February. Energy is up more than 13% month to date, with financials and materials also among the leading sectors.
Freezing weather in regions across the U.S. sparked another rally in energy futures on Monday and put West Texas Intermediate crude contracts above $60 a barrel for the first time since the early days of the coronavirus pandemic.
In corporate news, CVS Health, Occidental Petroleum, Palantir and others will report earnings on Tuesday.
Executives from Robinhood, Melvin Capital and Citadel are scheduled to testify before the House Financial Services Committee on Thursday. Lawmakers are likely to grill the group on the wild trading in GameStop and other heavily shorted equities.
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