Dow futures rise 250 points as market set to rebound from worst week since October

Stock futures rose in early trading on Monday as Wall Street appeared to shake off concerns about speculative retail trading mania that largely drove the market’s worst weekly sell-off since October.

Futures contracts tied to the Dow Jones Industrial Average gained 260 points, implying an opening gain of more than 200 points. S&P 500 futures climbed 1% and Nasdaq 100 futures jumped 1.1%. The moves came in a choppy session, with Dow futures dropping as much as 300 points overnight.

GameStop, the brick-and-mortar video game retailer that has been the center of attention on Wall Street, inched up just about 3% in premarket trading. Last week, the popular stock among retailer investors on Reddit forum WallStreetBets soared 400% amid extreme trading volume and volatility.

All three major averages slipped more than 3% last week for their worst weekly performance since October. The Dow and S&P also posted losses for January — the first negative month in four — although the Nasdaq did manage to post a gain for the month.

Tobias Levkovich, Citigroup’s chief U.S. equity strategist, believes the market’s valuation is stretched and that the recent turmoil fueled by retail traders is the kind of thing that could spark the start of a correction from these overvalued levels.

“We think that the vulnerabilities are there, and while we do not know precisely which catalysts might emerge or their exact timing (including some of the recent retail-oriented pushes against heavily shorted stocks), we suspect that they would derail the current rally and provide entry points that may be 10% lower,” he wrote in a note to clients.

The Reddit boom seems to be spreading to other areas of the market. Futures contracts for silver surged 11%, the biggest one-day jump in 11 years. The Reddit forum had multiple active threads dedicated to silver on Sunday night. The phrase “#silversqueeze” was also trending on Twitter.

Many on Wall Street were spooked by a frenzy of activity by retail investors in heavily-shorted stocks including GameStop and AMC Entertainment, which fueled concerns about the overall health of the market. Goldman Sachs noted that the current short squeeze is the worst in 25 years.

“This week’s events may have turned markets on their heads, but fear indicators imply that we may have seen the worst of the degrossing,” Jefferies wrote in a note to clients over the weekend. Barclays added that it’s unlikely that the impact of the short squeezes will ripple through the broader market.

“The ongoing short squeeze in a few stocks by retail investors has raised concerns of a broader contagion,” the firm wrote in a recent note to clients. “While we believe there is more pain to come we remain optimistic that it is likely to remain localized.”

Meanwhile, a group of 10 Republican senators sent President Joe Biden a letter on Sunday, urging him to consider a smaller, scaled-down Covid-19 relief proposal. His current plan calls for $1.9 trillion in additional fiscal stimulus. The alternative proposal comes after House Speaker Nancy Pelosi said the chamber will move to pass a budget resolution, the first step toward approving legislation through reconciliation. The process would enable Senate Democrats to approve an aid measure without GOP votes.

Elsewhere, another busy week of earnings is coming up with 99 S&P companies set to report. Alphabet, Amazon, Alibaba, Snap, Exxon, Biogen, Pfizer and Chipotle are among the names set to report this coming week. Thursday is the busiest day of the earnings season.

“We believe the medium-term path for the market remains higher,” noted Mark Haefele, global CIO at UBS Wealth Management. “In a similar pattern to the previous two quarters, corporate earnings for 4Q20 are exceeding expectations by a significant margin.”

He added that a stimulus package, as well as investors looking beyond delays to vaccine production and distribution, should further boost stocks.

—CNBC’s Jacob Pramuk contributed reporting.

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