Dow Jones Retakes 18,000 Despite Disappointment in Doha

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On Wall Street, emotion often trumps logic. Greed and fear are powerful motivators.

This was seen on Monday as U.S. equities soared, pushing large caps to levels not seen since July, despite a “no deal” result from the eagerly awaited Russia-OPEC production freeze meeting in Doha on Sunday.

The meeting, which included 18 nations responsible for 59% of the world’s energy output, broke up in acrimony after months of hints an agreement would start bringing the oversupplied global oil market back into balance.

Initially, crude oil and equities futures traded lower in the overnight session. A 52% drop in reported Morgan Stanley (NYSE:MS) earnings didn’t help either. But after an opening bounce as cash trading opened this morning, buyers appeared and prices soared.

In the end, the Dow Jones Industrial Average moved up 0.6%, the S&P 500 gained 0.7%, the Nasdaq Composite finished 0.4% higher and the Russell 2000 ended the day with a 0.7% gain. Treasury bonds weakened, the dollar fell modestly, oil lost 1.1% to close at $39.91 (losing the $40-a-barrel threshold), and gold lost 0.1%.

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Energy, oddly given the crude drop, was the day’s best performer with a 1.6% gain. General Motors Company (NYSE:GM) gained 2.5% and Ford Motor Company (NYSE:F) gained 2.4% on a positive Barron’s cover story on the auto industry. Walt Disney Co (NYSE:DIS) gained 2.9% on better-than-expected weekend box office numbers for The Jungle Book.

Netflix, Inc. (NASDAQ:NFLX) lost 2.8% on competitive pressure (Amazon’s Prime Video now available for $9 a month) and caution ahead of earnings.

So why the big rebound?

I can’t explain it definitively, but it’s likely a combination of an ongoing short squeeze (most shorted stocks led the way), technical impetus to get the Dow back to 18,000 and a nagging concern that a loss of diplomatic goodwill inside OPEC could result in deepening military tensions between Iran/Russia and Saudi Arabia/Gulf states.

It’s also possible the equity rebound had more to do with dovish Federal Reserve comments from NY Fed President William Dudley than anything else. Dudley echoes recent “wait and see” sentiment with comments that policy normalization was likely to be gradual and cautious given significant uncertainties and headwinds to global growth. He added that recent U.S. economic data has been favorable.

Translation: Things are good, but with inflation not yet a clear and present problem, interest rates aren’t going anywhere. Unfortunately for the bulls, today was the last day for stocks to enjoy verbal support from Fed officials as they enter a media blackout period ahead of a policy meeting later this month.

While no rate hike at the April meeting is expected, the statement will be closely analyzed for hints of a possible June hike.

After the close, both NFLX and International Business Machines Corp. (IBM) reported better-than-expected quarterly earnings. IBM also beat on the top line, while NFLX missed sales estimates. Investors pooh-poohed the results, however.

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NFLX shares were slammed more than 10% in after-hours trading on profitability/cash flow concerns, with operating income down from last year ($107 million vs. $140 million) and a drop in operating margins (2.5% vs. 6.2%). It also cut its international subscriber forecast and burnt through $1 billion in cash over the past 12 months. IBM was down more than 3% amid ongoing concerns about a persistent decline in revenues that started in 2012, with its latest sales result the lowest in 14 years.

While a cross of 18,000 is impressive, the deck remains stacked against stocks here on both technical and fundamentals headwinds.

The Fed is now dark and could very well hike rates in June — likely its last opportunity before December to avoid influencing the upcoming presidential election.

Crude oil looks set for a bout of weakness: Breadth remains unimpressive, with only 1,407 net advancing issues on the New York Stock Exchange — down from 1,75-plus earlier in the month and 2,500 up days back in January — as buyers focus on a narrowing group of stocks to push the major averages higher.

And as evidenced by the drops in IBM and NFLX after the close, the Q1 earnings season remains a challenge with earnings expected to drop by the most since 2009.

Investors would do well to remain cautious.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/dow-jones-oil-opec-doha-ms/.

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