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Resurgence in US cyclical stocks provide further potential upside for stock indices

US stock market continued to extend gains for the second consecutive day, as the broad-based rally has spilled over to cyclical and value-oriented stocks.

The S&P 500 rose +1.39% to 3,826 and the Nasdaq 100 gained +1.56% to 13,456, with both of these indices just a whisker away at 1.2% and 0.8% respectively from their all-time highs printed on 25 January. In addition, the Dow Jones and Russell 2000 also posted solid gains of +1.6% and +1.2% respectively.

All 11 S&P sectors were in the green, with the previous laggards in the past two weeks, financials and industrials, taking over from the US big tech firms, with gains of +2.5% and +2.2%. These observations suggest a revival of cyclical and value theme plays, which in turn supports the medium-term uptrend phase of major US stock indices, which remains intact since October 2020. In contrast, Reddit’s WallStreetBets basket of meme stocks continues to crater, with shares of GameStop and AMC Entertainment tumbling by -60% and -41.20% respectively.

The US dollar continued to advance in yesterday’s US session, as the US Dollar Index inched higher by +0.24% to 91.20, a two-month high. However, the ongoing strength seen in the US dollar since 6 January has not deterred the risk-on mood for now. Market participants have focused their attention towards the share prices of GameStop and AMC Entertainment, which have an indirect correlation with the movement of the broader market.

The past two days of declines in the share prices of GameStop and AMC Entertainment has reduced the risk of a liquidity crunch faced by online brokerages such as Robinhood, and broken the negative feedback loop triggered by fears that hedge funds will continue to unwind their winning long positions in cyclical, value and big tech stocks, which have been accumulated in the past few months to offset losses incurred by 'short squeezes' on short positions in GameStop and AMC.

Also, the Covid-19 vaccination rate has started to increase steadily in the US and globally, hence the focus has started to shift towards an expectation of a more robust economic recovery in the second half of this year, which explains the bullish tone seen in stocks right now. In addition, the economic recovery story has been reflected in the US Treasury 10-year yield, which has continued to inch higher since 28 January, where it increased by 3 basis points to 1.11%, a five-day high.

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