U.S. stocks on Tuesday built on already-strong February gains after a market volatility gauge fell below a key threshold, paving the way for more buying from quant funds.
The Dow Jones Industrial Average climbed 120 points to an all-time high. The S&P 500 rose 0.4% and the Nasdaq Composite gained 0.5%, both hitting record highs.
Energy was the best-performing sector, rising 2.2% as a deep freeze in the South sparked a rally in oil prices and put West Texas Intermediate crude futures above $60 a barrel for the first time in over a year.
The Cboe Volatility Index, widely viewed as Wall Street’s best fear gauge, broke below 20 to settle at 19.97 on Friday, marking the first significant breach of the threshold since the pandemic-induced sell-off began in February 2020.
The crack of the 20 level is viewed by some on Wall Street as a big “risk on” signal, which could trigger buying from algorithmic traders and other big players. The gauge last traded up about one point to 21 on Tuesday morning.
“We believe a sustained move below 20 will be positive for risk markets,” said Tom Lee, FundStrat’s co-founder and head of research. “It will be a sign that the systemic fear that gripped markets in 2020 is finally fading.”
Lee, a CNBC contributor, added that receding fear in the market is usually followed by buying among systematic and quant funds. Should quantitative funds herald a retreating VIX as a positive sign, Lee believes that buying could extend the current rally.
Tuesday’s advance added to the market’s solid gains this month thanks to the rollout of the Covid-19 vaccine, economic reopening and expectations for more fiscal stimulus. The Dow has gained 5.3% in February, while the S&P 500 and the Nasdaq have rallied 6.3% and 8.3%, respectively. The S&P 500 has raked in ten record closes in 2021.
“Covid is far from defeated, but the path toward economic normalization is clearer as more vaccines that reduce hospitalizations and eliminate fatalities are approved,” Dennis DeBusschere, strategist at Evercore ISI, said in an email.
On Tuesday, the 10-year Treasury yield topped 1.25% for the first time since March amid rising inflation expectations.
Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.