Stocks rally as Wall Street tries to move past short squeeze jitters

U.S. stocks traded higher Monday afternoon as the market attempted to recover from its worst weekly loss since October, after frenzied trading in videogame retailer GameStop Corp. and others fueled a ripple of selling on Wall Street.

How are stock markets performing?
  • The Dow Jones Industrial Average
    was up 221 points, or 0.7%, to 30,203, after hitting an intraday high of 30,259.83.

  • The S&P 500
    added 57 points, or 1.5%, to trade near 3,771.

  • The Nasdaq Composite
    surged 311 points, or 2.4%, trading near 13,381.

Stocks on Friday registered their worst weekly declines since the period ended Oct. 30. The Dow closed 3.2% lower for the week, the S&P 500 was down 3.3% and the Nasdaq Composite finished with a weekly slide of 3.5%.

For the month, the Dow lost 2%, the S&P 500 shed 1.1% and the Nasdaq Composite gained 1.7%.

What’s driving the market?

Stock-market bulls were attempting to bounce back from an epic short squeeze that gripped Wall Street and Main Street last week, adding to worries about inflated stock valuations.

Read next: A financial-markets whodunit is rocking the exchange-traded world

The three major indexes posted their worst week and calendar month since October on Friday, as volatile trading in bricks-and mortar retailer GameStop
and movie chain AMC Entertainment Holdings
prompted fears that further forced selling in highly leveraged and heavily shorted areas of the market would put pressure on prices.

Last week, shares of GameStop soared 400% and AMC Entertainment ended 277% higher and Koss Corp.
rallied 1,816%, amid extreme trading volume and volatility that forced many brokerages to curb trading activity in certain names. GameStop shares were down 22% Monday.

“The mayhem on Wall Street has already attracted the attention of regulators and lawmakers but until action is taken, it is looking unlikely that the frenzy will settle down,” wrote Raffi Boyadjian, senior investment analyst at XM, in a daily research note.  

Indeed, last week’s moves compelled brokerages, including Robinhood Markets, to limit trading on its platforms. The wild trading in stocks by individual investors also drew the attention of the White House, Congress and regulators, including the Securities and Exchange Commission.

See: New MarketWatch data page: U.S.’s most heavily shorted stocks

Meanwhile, the social-media trading community appears to have turned its attention to the $1.6 trillion silver market
Silver has rallied in recent trading sessions after users on Reddit’s WallStreetBets forum posted about executing a “short squeeze” similar to ones credited with fueling GameStop’s surge.

Despite Monday’s gains, technical analyst Katie Stockton, founder of Fairlead Strategies, thinks there still may be room for a broader and deeper downturn over the next few weeks. Stockton, who predicted the January downturn in December, told MarketWatch that there are both near-term and medium-term indicators that markets could remain choppy and biased to the downside.

“The current environment has been likened to 2018,” Stockton said. “We came into 2018 pretty hot, and the S&P 500 had some acceleration before giving way to a pretty damaging short-term pullback. The overall takeaway is that it’s just the stuff of a pullback. When sentiment is shifting, it does so in dramatic fashion.”

Stockton said market corrections can be healthy, since they relieve excessive optimism from time to time. “When ‘Saturday Night Live’ starts covering the stock market you know we’re in trouble,” she said.

Recent gains come amid a decline in U.S. COVID-19 cases, with newly reported coronavirus cases down Sunday from a day earlier, as were hospitalizations and deaths.

Investors continue to watch the progress of President Joe Biden’s proposed $1.9 trillion economic aid package. Hopes for aid, along with the Federal Reserve’s pledge to keep low-cost credit plentiful, have buttressed financial markets. CNBC reported over the weekend that a group of 10 Republican senators, in a letter, called on Biden to consider a smaller proposal of $600 billion.

In corporate quarterly results, around 100 S&P 500 companies were set to report earnings this week, including Inc.
and Google parent Alphabet Inc.

due Tuesday.

In economic reports, the Institute for Supply Management’s manufacturing index for January slipped to 58.7 in January from 60.5 in the prior month. Any number above 50 represents an expansion in industrial activity.

“The nation’s factories are still humming, despite the uncertainty created by the slowing economy.  Normally, you would expect to see softer manufacturing conditions against the weaker economic backdrop that has developed in recent months,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors.

Meanwhile, outlays for construction projects rose 1% in December at a seasonally adjusted annual rate of $1.49 trillion.

Which companies are in focus?
  • Shares of Thermo Fisher Scientific Inc.
    rose 1.8% after the health care diagnostics and therapies company reported a big earnings beat and revenue.

  • Northrop Grumman Corp.
    said Monday it has entered a $2 billion accelerated share buyback agreement with Goldman Sachs & Co. The defense company’s shares were up 2.3%.

  • Shares of Otis Worldwide Corp.
    slipped after the elevator and escalator maker reported fourth-quarter profit and sales that rose above expectations, and provided an upbeat full-year outlook.

  • Shares of Eaton Corp.
     rose 2% after the power management company announced an agreement to buy Cobham Mission Systems in a deal valued at $2.83 billion.

  • Shares of Apple Inc.
    gained 1.9% after the company said it would sell bonds for general corporate purposes, which could include share buybacks.

How other assets performing?
  • U.S. crude-oil futures
    climbed 2.3% to $53.42 a barrel on the New York Mercantile Exchange. In precious metals, gold futures
    gained 0.7% to $1,862.50 an ounce.

  • The 10-year Treasury note yield
    was down nearly 1 basis point to 1.071%. Bond prices move in the opposite direction of yields.

  • The greenback strengthened 0.4% against its major trading partners, based on the ICE U.S. Dollar Index.
  • The Stoxx Europe 600 index
    closed 1.2% higher, while the U.K.’s FTSE 100
    gained 0.9%. In Asia, the Nikkei
    closed 1.6% higher and China’s CSI 300 index
    added 1.2% and the Shanghai Composite
    gained 0.6%.