Monday Told a Tale of 2 Stock Markets

The stock market was largely down on Monday, although not all of the major market benchmarks reflected those declines. The Dow Jones Industrial Average (^DJI 0.56%) actually gained ground on the day, while the Nasdaq Composite (^IXIC -2.05%) plunged. Losses in the S&P 500 index (^GSPC -0.88%) essentially split the difference.

Data source: Yahoo! Finance.

Within the market, there was considerable tension across different sectors. Gains were largely concentrated in a single sector, although a couple of others managed to post solid rises. Yet there were three big sources of downward pressure on the stock market, all of which played a role in pulling markets lower.

Feeling the energy

Energy stocks  were the big winner on Monday, with a key sector benchmark gaining 3.5% on the day. Positive moves were solid across the board, with exploration and production companies, midstream pipeline providers, and downstream refining stocks all posting good gains.

The obvious catalyst for the upward move was a big jump in crude oil prices. Futures were up nearly $2.50 per barrel, sending the price toward the $62 mark. That represents a huge improvement from the weakness that lasted throughout 2020, and it's high enough that many E&P companies are able produce crude profitably at those levels.

Image source: Getty Images.

Investors are also looking more broadly at signs of potential inflationary pressure. Under such conditions, energy stocks often perform quite well. Given the depressed levels at which these stocks have traded lately, a big bounce was already in the cards assuming the sector could recover at all.

Also gaining ground on Monday were financial stocks. Inflationary pressures have pushed long-term yields higher, and that in turn has the prospects for big banks looking better. The question for financials is whether the reflationary trade will be controlled, because high inflation isn't any better for banks than rock-bottom interest rates.

Tanking tech

Meanwhile, technology and consumer discretionary stocks took the biggest poundings, falling more than 2% each. In most people's minds, both of those sectors are in the same high-growth category, because Amazon.com (AMZN -2.56%) and Tesla (TSLA -1.92%) make up almost 40% of the weighting of the Select Sector SPDR ETF that deals with consumer discretionary stocks.

Tesla in particular took a big hit, with some pointing to some news about the Model Y sport utility vehicle. Reports noticed that the low-cost standard-range version of the vehicle was apparently no longer available on the website, and CEO Elon Musk said that while customers can still order the vehicle, "I don't think the range, in many drive conditions, yet meets the Tesla standard of excellence."

Meanwhile, many high-growth tech stocks also corrected sharply. That included several cloud-centered software-as-a-service stocks that had been highfliers in 2020.

Watch for what's next

In the past, investors have been quick to draw big conclusions from these apparent sector rotations, only to discover that in hindsight they end up being one-day events. After such a huge move higher, though, it's inevitable that the Nasdaq and strong-performing sectors like tech and the more tech-focused consumer discretionary stocks will need to go through a more substantial correction.

With it having been a year since the coronavirus bear market, many investors have downturns on their mind. Today's move is bringing out the usual naysayers, and now it's up to market participants to decide whether they'll heed the same warnings they've heard for months now.