Recent leaders lag

02/22/21
  • Russell 2000 and Nasdaq 100 cool
  • Oil surges, energy and financials heat up
  • This week: Key housing numbers, GDP update, retail earnings

Heading into the final week of February, the stock market just experienced something for the first time this month—a pullback.

It isn’t much of one—so far, at least—but most major US stock gauges ended the week in the red, weighed down by selling in market-leading small caps and tech.

The S&P 500 (SPX) kicked off the holiday shortened week with a new all-time intraday high last Tuesday, but slumped to a lower close and followed through with three more down days to register its first four-day losing streak of the year:

Chart 1: S&P 500 (SPX), 12/3/20–2/19/21. S&P 500 (SPX) price chart. Pullback from record high.

Source: Power E*TRADE


The headline: Broad market pulls back for first time since January.

The fine print: Leaders were laggards last week—the Russell 2000 (RUT) was down more than 3% for the week by Thursday before roaring 2.2% to the upside on Friday (see "Let's discuss the Russ," below), and many leading tech names continued to trade soggily.

The quote: “I think the price of doing too little is much higher than the price of doing something big.” Treasury Secretary Janet Yellen on the need for more aggressive economic stimulus measures.1

The scorecard: The RUT may have lost the most ground last week, but its year-to-date return is still twice that of its closest index competition:

US stock index performance table for week ending 2/19/20. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source (data): Power E*TRADE


Sector roundup: The strongest S&P 500 sectors last week were energy (+4.5%), financials (+3.8%), and materials (+1.9%). The weakest sectors were utilities (-2.7%), health care (-1.6%), and information technology (-1.5%).

Highlight reel: On Wednesday QuantumScape (QS) +31% to $66.52, Mednax (MD) -25% to $20.82 on Thursday.

Futures action: Crude oil soared to its highest point in more than 13 months in the aftermath of the winter storm that crippled Texas, knocking out a fifth of US oil-refining capacity in the process.2 April WTI crude oil (CLJ1) rallied to a fresh contract high of $62.29/barrel on Thursday before pulling back to end the week at $59.26. Early Friday, slumping April gold (GCJ1) hit its lowest level ($1,759/ounce) since last June before bouncing to close Friday at $1,777.40.

Coming this week

Get ready for the late-season surge of retail and consumer earnings—and some notable tech names, too:

Monday: Palo Alto Networks (PANW), Occidental Petroleum (OXY), Five9 (FIVN), Freshpet (FRPT), Korn Ferry (KFY), RealReal (REAL)
Tuesday: Verisk Analytics (VRSK), Toll Brothers (TOL), Hyliion (HYLN), Home Depot (HD), Dillard's (DDS), LGI Homes (LGIH), Penumbra (PEN), Square (SQ), Intuit (INTU), Upwork (UPWK), Medtronic (MDT)
Wednesday: Apache (APA), Hostess (TWNK), Booking Holdings (BKNG), L Brands (LB), NVIDIA (NVDA), TJX (TJX), Lowe's (LOW), Corelogic (CLGX), Teladoc (TDOC), Overstock.com (OSTK), ViacomCBS (VIAC), Pure Storage (PSTG)
Thursday: Airbnb (ABNB), Best Buy (BBY), Beyond Meat (BYND), Keurig Dr. Pepper (KDP), Domino's Pizza (DPZ), Editas Medicine (EDIT), First Solar (FSLR), Virgin Galactic (SPCE), Wayfair (W), Sunrun (RUN), iRhythm Technologies (IRTC), Moderna (MRNA), Salesforce.Com (CRM), Workday (WDAY)
Friday: DraftKings (DKNG), Foot Locker (FL)

The week’s economic calendar features housing numbers, the second GDP estimate, and leading indicators:

Monday: Chicago Fed National Activity Index, Leading Indicators
Tuesday: S&P/Case-Shiller Home Price Index, House Price Index, Consumer Confidence
Wednesday: New Home Sales
Thursday: Durable Goods Orders, Q4 GDP (2nd estimate), Pending Home Sales
Friday: Personal Income and Spending, PCE Price Index, Wholesale Inventories (advance), Goods Trade Balance (advance), Michigan Consumer Sentiment

Go to the E*TRADE market calendar for an up-to-date earnings schedule and complete list of splits, dividends, IPOs, and economic reports. The Active Trader Commentary also lists earnings announcements, IPOs, and economic report times each morning.

Market Mover Update: Renewable energy stocks were one of the stronger areas of the market on Friday, including SunPower (SPWR), which rallied 4% (see “The other energy story”).

Other market factors notwithstanding, last week’s pullback reflected the pattern described in “Behind the news,” as well as the post-Presidents Day slump described in “Hovering near highs.”

Let’s discuss the Russ

Although the Russell 2000’s (RUT) 3.5% decline from February 9 to last Thursday was almost as large as its downturn in the final week of January, it was only the third meaningful pullback since October 30 for the small-cap index, which has gained more than twice as much (47%) as the SPX or NDX over the past 16 weeks.

Chart 2: Russell 2000 (RUT), 10/16/20–2/19/21. Russell 2000 (RUT) price chart. Recent pullbacks and rebounds.

Source: Power E*TRADE


Although this pullback isn’t necessarily over—it won’t officially end until the RUT climbs back above the February 9 closing high of 2,299 or the February 10 intraday high of 2,318.09 (take your pick)—Friday’s 2.2% rally, which followed Thursday’s 1.7% loss, may have caught the eye of traders who have noticed a similar dynamic near the bottom of some other pullbacks.

The price action after the examples on the chart—downturns that include a 1%-or-larger down day reversed immediately by a 1%-or-larger up day—isn’t necessarily representative, since it’s taken place during one of the strongest uptrends in the RUT’s history. Nonetheless, more often than not the RUT has continued to rally in the near term after similar two-day reversals, with the index higher five days later 60% of the time.3

The important point isn’t whether things play out in a similar way this time—after all, four out of 10 times in these situations it hasn’t, and the RUT may fall below last week’s low and break the recent pattern. But knowing what the market usually does can provide a benchmark for determining when it’s potentially behaving out of character—useful information for prudent traders.

 

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1 CNBC.com. Stock futures rise after Yellen pushes for more stimulus. 2/18/21
2 Reuters. Texas deep freeze hits energy sector, Houston ship channel shut. 2/16/21.
3 Based on Russell 2000 (RUT) daily closing prices, 9/23/87–2/19/20. Pattern discussed consists of a day that closes below the previous five closes, and at least 1% below the previous day’s close, followed by a day that closes up 1% or more (158 examples). Supporting document available upon request.

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