Chinese Stimulus Heats Up U.S. Stocks

Stocks rebounded strongly on Monday thanks to an over-the-weekend move by Chinese authorities to restore sentiment after a big 7% drop in China’s equity futures on Friday night. That was in response to a move by regulators to clamp down on margin trading and expand short selling in an apparent effort to lean against the rapid rise in the Shanghai Composite.

Frightened about popping China’s nascent stock market bubble, officials unveiled new monetary policy stimulus (a reserve ratio cut), talked up the possibility of bond buys or extended bank loans, and talked down the significance of Friday’s actions.

And if we’ve learned anything over the last few years, there is little that gets the bulls as excited as the announcement of new stimulus.

In the end, the Dow Jones Industrial Average gained 1.2% to cross back over the troublesome 18,000 level, the S&P 500 gained 0.9%, the Nasdaq gained 1.3% and the Russell 2000 gained 1%.

dow jones industrial average

Crude oil added 3.6% to close at $57.72 a barrel as the summer driving season approaches. Gasoline futures are on the verge of returning to levels not seen since November and are already up 57% from the lows seen in January.

As they say, all good things come to an end.

Transportation stocks were the leaders on the day, pushing the iShares Transportation Average ETF (NYSEARCA:IYT) up 1.7% as the fund cut above its 20-day moving average for the first time since March.

The Q1 earnings season continues to roll on with 151 S&P 500 companies set to report this week. Hasbro, Inc. (NASDAQ:HAS) gained 12.6% on a big Q1 revenue and earnings beat despite currency headwinds. Oil services play Halliburton Company (NYSE:HAL) gained 2.1% thanks to a top- and bottom-line beat and strong margins. Morgan Stanley (NYSE:MS) reported a solid quarter with both earnings and revenue beating expectations; top-line growth hit 10% over last year.

After the close, International Business Machines Corp. (NYSE:IBM) drifted lower after reporting weaker-than-expected revenues that fell nearly 12% on a year-over-year basis. On a top-line basis, that was the worst result since 2002. Earnings beat expectations coming in at $2.91 per share — 8 cents ahead of the consensus estimate — thanks largely to aggressive share buybacks.

I’m noticing a number of big blue-chip stocks turning higher, which is a big deal since these stocks tend to move with the weight and inertia of supertankers. Top of the list, with exposure to what should be a nice turnaround in the Chinese economy this year, is Caterpillar Inc. (NYSE:CAT). CAT shares gained 1.6% today to challenge its February highs.

caterpillar stock

A breakaway here would potentially put an end to the long downtrend in the stock that started back in July. For more, be sure to check out my recent post discussion CAT and two other blue-chip stocks on the move here.

Other areas of focus right now are materials, energy and semiconductor stocks. This includes the 8% gain in United States Steel Corporation (NYSE:X) calls that Edge Pro subscribers have bagged in just one day, and the 5.1% gain Edge subscribers are enjoying in the Market Vectors Oil Services ETF (NYSEARCA:OIH).

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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