Stocks and index ETFs are pulling back on Tuesday, with the S&P 500 retracting from a fresh high as investors may be booking profits after a strong run-up.
The Dow Jones Industrial Average and the S&P 500 each dipped about 0.2%, slipping for the first time in a week. The Nasdaq Composite held its ground meanwhile, gaining the same amount to notch a fresh record high, thanks to support from stocks like Facebook and Netflix, which added over 2% each. Amazon, Microsoft, and Alphabet all also traded higher.
Major stock ETFs are mixed on Tuesday too. The SPDR Dow Jones Industrial Average ETF (DIA) and SPDR S&P 500 ETF Trust (SPY) are both trading lower like their underlying indices, while the Invesco QQQ Trust (QQQ) is making slight gains just after noon EST.
While investors have been driving the market higher, excited by the possibilities of a smooth economic reopening now that coronavirus vaccine rollouts are in place, they seem to be taking some funds off the table as stocks reach both technical and psychological levels such as 3900 for the S&P 500. The recently robust energy sector dropped 2.4%, cutting its February gains to 10%, and driving the Energy Select Sector SPDR Fund (XLE) 1.8% lower. Financials also fell 0.5% after climbing more than 7% this month, causing ripples in ETFs like the Invesco KBW Bank ETF (KBWB), which is down slightly Tuesday.
The Russell 2000, which has been on a tear lately, surging over 15% this year, also slipped 0.3%, although the Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC) continued to outperform, gaining almost 3%.
Are Stock ETFs Too Frothy?
Analysts and banks like Bank of America are weary that stocks have become too frothy, saying that a market correction could be coming soon. Nevertheless, current conditions could offer an opportunity for sidelined investors to jump on board the bull trend.
“We expect a buyable 5-10% Q1 correction as the big ‘unknowns’ coincide with exuberant positioning, record equity supply, and ‘as good as it gets’ earnings revisions,” Jared Woodard, investment and ETF strategist at Bank of America, said in a note.
Lawmakers also seem to be making strides toward another economic relief bill, with House Democrats on Monday releasing the details of a relief proposal, something that could also prove bullish for stocks.
“The outlook for stocks continues to get more positive in the near term, plain and simple,” Tom Essaye, founder of Sevens Report, said in a note. “The stock positive formula of Massive (and unwavering) Fed support + Massive new fiscal stimulus + COVID declining and vaccine distribution ramping up is becoming more real, and stocks are rallying as a result.”
Overall, financial experts appear largely optimistic that more upside is in store for markets.
“To change the narrative, it would have to be something pretty significant,” Victoria Fernandez, chief market strategist at Crossmark Global Investments. said. “It would have to be something that really changes the expectations about what’s going to happen with the labor market, or what’s happening with vaccines, or the guidance that we’ve been getting from companies on earnings.”
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