US stocks rallied Friday, and the S&P and Nasdaq indexes posted their largest weekly percentage gains since the US election in early November, fueled by optimism about earnings, stimulus talks and progress in vaccine introduction.
The S&P 500 rose for a fifth straight session in its longest streak of gains since August. The benchmark index and the Nasdaq posted record highs for a second day at close.
The Dow Jones Industrial Average rose 92.38 points, or 0.3 percent, to 31,148.24, the S&P 500 gained 15.09 points, or 0.39 percent, at 3,886.83 and the Nasdaq Composite rose 78.55 points , or 0.57 percent, at 13,856.30.
For the week, the S&P 500 gained 4.65 percent, the Nasdaq 6.01 percent and the Dow 3.89 percent. The small-cap Russell 2000 index was up 7.7 percent this week, its largest weekly percentage gain since the week ending June 5.
But as the trading frenzy that took shares of GameStop Corp and other retail investor favorites wanes, investors are seeing signs of potential market stress that could weigh on broader stock performance in the coming weeks.
For now, US stocks seemed to be looking past the surge in volatility that led the S&P 500 to its largest weekly decline since October last week, as solid earnings, fiscal stimulus expectations and progress in nationwide vaccination efforts drove stocks back to record highs. .
However, some investors were concerned that wild swings in GameStop shares and other “meme” stocks have increased concerns about market volatility and high valuations, which could make investors more risk averse.
“The recent retail activity has been a cause for concern for the wider market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.
According to BofA analysts, liquidity in futures on the S&P 500 dried up as market makers and other investors tried to mitigate risk during the GameStop surge. Earlier this week, “market fragility,” as measured by the bank, was at its highest level since March 2020, leaving US stocks extremely vulnerable to sudden market shocks, the company said.
Moves in the Cboe Volatility Index, known as Wall Street’s ‘fear meter’, also indicated that investors may be more sensitive to market turbulence than usual: Last Wednesday, the index rose 14 points, its biggest one-day gain since March as the S&P 500 lost 2.6 percent.
According to Stuart Kaiser, strategist at UBS, the fear meter climb was eight to 10 points higher than the expected move following such a fall in the S&P 500. The outrageous reaction, he said, points to heightened investor nervousness that could indicate greater sell-offs in the market in response to negative developments.
The VIX has since bounced back to its post-pandemic lows as US stocks rebounded this week. Still, “I wouldn’t say we’re all over it,” Kaiser said.
Next week, investors will look at quarterly results from Cisco Systems Inc, General Motors Co and Walt Disney Co, as well as data on US consumer prices.
For now, the options markets are not really giving the green light.
According to Charlie McElligott, managing director, cross-asset macro strategy at Nomura, investor demand for a reliance on the S&P 500, which is used to position for gains in the index, has skyrocketed after it hit rock bottom earlier this week. had fallen over several decades. The swings in demand indicate the risk of a downturn and choppy trading in the coming weeks, he said.
Longer term, several market analysts said the GameStop effect may be nothing more than a radar screen bleep for the markets as a whole. According to Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group, declines in the VIX of 20 percent or more are promising for stocks, with the S&P 500 up 2.6 percent a month later.
Still, the exuberance that widens the market’s fault lines hasn’t entirely faded. According to data from Trade Alert, the options activity showed strong demand for upward calls in the SPDR S&P Retail ETF, including GameStop, and the iShares Silver Trust, which was also rocked by retailers.
As a result, some investors said they plan to exercise caution for the time being, especially if exposed to passive funds that hold a large number of small-cap stocks that could be prone to a sudden shopping frenzy.
“Time will tell if this has a more sustainable effect on the market,” said Matt Forester, Chief Investment Officer of Lockwood Advisors. “We need to monitor our holdings to make sure we are not overly exposed to these trends.”