Stock rally continues beneath the surface on investors’ hopes for reopenings and testing

I know this sounds strange, but this was a good day for the stock market, even with a disappointing close that pushed the S&P 500 into negative territory.

Yes, tech and health care were down. The five largest stocks — Apple, Microsoft, Amazon, Alphabet, Facebook — were down for the second day in a row. 

But look underneath the hood, and you will see the continuation of a powerful rally.

 Consider:

1. Breadth is expanding: Advancing stocks led declining stocks by an almost three-to-one margin.
2. The equal-weight S&P 500 — where each stock has the same weighting — is up 4.3% this week; the market-cap weighted S&P 500 is up a measly 0.9%.
3. The small-cap Russell 2000 is up 5.2%, finally outperforming the S&P 500, up 0.9%
4. Sector laggards — banks, industrials and energy — have become market leaders in the last few days.

What’s going on? 

Call it the melding of the “reopening hopes rally” with the “hopes for expanded testing” rally.

“A lot more people have been sick than the numbers indicate, and the numbers of those exposed is higher than people think,” said  Peter Tchir at Academy Securities. “This is good because people realize there may be room for reopening.”

His two favorite sectors are energy and financials. “They’ve been really beaten up and it doesn’t take much for those sectors to do well,” he said.

Jurrien Timmer, Director of Global Macro at Fidelity Investments, also took note of the improving internals in a note to clients today. “The ability to hold up despite overbought technicals is, in my view, a very good sign,” he wrote.

Still even Timmer admits the rally may be reaching the upper ranges of what it can attain short-term.

“My overall view of the market is that after a 30% rally, the SPX has entered a trading range of around 2600-2900. Since we are pressing up against the upper bounds of that range, some more consolidation or retracement seems likely for now.”