
From SuperDebugger it seems that the select stage scene contains in fact the two pointers (red + green squares). For some reason they're not displayed. Also the round shape could be just due to the application of a texture.
I think that for the same reason in the (in)famous night stage with the T-Rex chasing you, the torch effect could be a giant black poly superimposed to the scene with a "hole" texture (where alpha = 0). Moving the cursor to the bottom the poly gets squashed, hence the torch shape becoming more ellipsoidal. The rest of the scene is just rendered fine.
Too bad I can't load on the SuperDebugger the relative savestate floating around this forum to confirm this.

Also I don't think spotlight is used there since most of its parameters are set to 0.
In this picture the two pointers overlaps: