US stocks rose on Friday and the S&P and Nasdaq indices recorded their largest weekly percentage increase since the US election in early November, bolstered by earnings optimism, stimulus talks and progress with vaccine launches.
The S&P 500 rose for a fifth consecutive session in its longest series of gains since August. The benchmark index and the Nasdaq set a second day record.
The Dow Jones industrial average rose 92.38 points, or 0.3 percent, to 31,148.24, the S&P 500 averaged 15.09 points, or 0.39 percent, at 3,886.83, and the Nasdaq Composite. 78.55 points, or 0.57 percent, added at 13,856.30.
For the week, the S&P 500 rose 4.65 percent, the Nasdaq 6.01 percent and the Dow 3.89 percent. The Russell 2000 Index with a small capitalization rose 7.7 percent for the week, the largest weekly percentage increase since the week ended June 5th.
But as the stock rush that GameStop Corp shares and other retail investors’ favorites take on a wild ride declines, investors are seeing signs of potential market stress that could weigh on the broader stock performance in the coming weeks.
For now, US equities appear to be looking beyond the volatility increase that led the S&P 500 to its biggest weekly decline since October last week, as good earnings, fiscal stimulus expectations and progress in nationwide vaccination efforts led equities to record highs. .
However, some investors were concerned that the game swing in GameStop shares and other “equity stocks” could exacerbate concerns about market volatility and increased valuations that could make investors more risk averse.
“Recent retail activity has been important for the broader market,” said Benjamin Bowler, head of global equity derivatives research at BofA Global Research.
According to BofA analysts, the liquidity of futures contracts on the S&P 500 has dried up as market makers and other investors wanted to reduce the risk during the GameStop boom. Earlier this week, the “market fragility”, as measured by the bank, stood at its highest level since March 2020, making US equities extremely vulnerable to sudden market shocks.
Movements in the Cboe Volatility Index, known as Wall Street’s “fear meter”, also indicated that investors may be more sensitive to market turmoil than usual: last Wednesday, the index rose 14 points, its biggest one-day gain since March, as the The S&P 500 lost 2.6 percent.
According to Stuart Kaiser, UBS strategist, the climb of the fear meter was eight to ten points greater than the expected move after such a drop in the S&P 500. According to him, the excessive reaction indicates increased unrest among investors which could indicate greater sales of the market due to negative developments.
The VIX has since returned to its lows after the pandemic as U.S. stocks rose this week. Nevertheless, “I would not say that we are still completely over,” Kaiser said.
Next week, investors will look at quarterly corporate results from Cisco Systems Inc, General Motors Co. and Walt Disney Co., as well as data on U.S. consumer prices.
At the moment, option markets are not giving a completely green light.
According to Charlie McElligott, managing director of the cross-asset macro strategy at Nomura, investor demand for the S&P 500, which was positioned earlier in the index, rose after falling to a low of more than ten years earlier in the week. . The increase in demand indicates the risk of a downturn and bad trade in the next few weeks, he said.
In the long run, several market analysts have said that the GameStop effect could not just be a turn on the radar screen for the markets as a whole. A decline of the VIX of 20 percent or more tends to be predicted, with the S&P 500 rising 2.6 percent a month later, according to Christopher Murphy, co-head of Susquehanna Financial Group’s derivative strategy.
The exuberance that magnifies the fault lines of the market has not yet completely faded. According to data from Trade Alert, the option activity showed a strong demand for upward calls in the SPDR S&P Retail ETF, which includes GameStop, and the iShares Silver Trust, which was also ignored by retail.
As a result, some investors have said they are tentatively planning to tread carefully, especially if they are exposed to passive funds that own a large number of small-cap stocks that could be susceptible to a sudden retail frenzy.
“Time will tell if it has a more lasting effect on the market,” said Matt Forester, chief investment officer at Lockwood Advisors. “We need to police our possessions to make sure we are not overly exposed to these trends.”