The U.S. stock market was closed on Monday for Presidents Day.
Strategists cited a fall in the Cboe Volatility Index, widely viewed as Wall Street’s best fear gauge, for the recent optimism in the markets.
Fundstrat founder Tom Lee said the VIX’s drop below 20 means investors have grown more comfortable in the near term.
“Fear is receding from the market,” Lee, a CNBC contributor, wrote of the move 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.”
Cboe Volatility Index
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.
Pedestrians walk past a snow covered bull sculpture during a late season nor’easter in New York.
Lucas Jackson | Reuters
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.