Why Monday’s Rally May Be Dangerous

On Monday, stocks rebounded from a sharply lower opening that resulted from Friday’s disappointing jobs report. The Dow Jones Industrial Average was down 116.4 points just after the opening bell, but quickly reversed and closed with a gain of 117.6 points.

The jobs report missed the mark by a wide margin with employers adding just 126,000 jobs in March. Most economists had been expecting a reading of about 250,000, and with the markets closed Friday there was no way for stockholders to react until Monday’s opening.

But the bad news was treated as good news and buyers jumped on bargains. The expectation was that in light of the lower jobs number the Federal Reserve would delay an interest rate increase until late this year rather than around June as previously expected.

Tesla Motors Inc (NASDAQ:TSLA) rose 6.3% after announcing it had delivered 10,030 vehicles in Q1, 500 more than its initial forecast. Microsoft Corporation (NASDAQ:MSFT) jumped 3.1% following an upgrade by Wells Fargo & Co (NYSE:WFC) to “outperform” from “market perform.”

Crude oil prices jumped more than 6% to $52.14 a barrel, driving energy stocks up 1.8%. Contributing to this gain was news that Saudi Arabia increased the price of oil it sells to Asia for the second month in a row.

Utility stocks were the second-best performing sector of the day, up 1.4%.

Treasury prices fell, and the yield on the benchmark 10-year note rose to 1.92% from 1.85% on Friday. Gold futures were up 1.5% to $1,218.60 an ounce.

At Monday’s close, the Dow Jones Industrial Average soared 118 points to 17,881, the S&P 500 gained 14 points at 2,081, the Nasdaq was up 30 points at 4,917, and the Russell 2000 gained 5 points at 1,261.

The NYSE’s primary market traded 885 million shares with total volume of 3.3 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, advancers outpaced decliners by 1.3-to-1, and on the Nasdaq, advancers led by 1.2-to-1.

S&P 500 Chart
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The disappointing jobs numbers and the ultimate realization that the Fed was still the driving market force led to a gap down opening on the S&P 500, followed by a whipsaw rally.

The index dropped from Thursday’s close at 2,066.96 to Monday’s open at 2,064.87, and within seconds, the low of the day at 2,056.52. By 1:30 p.m., the S&P 500 had not only made up for the early loss, but hit the high of the day at 2,086.99.

Conclusion

Monday’s wild swing can be attributed in part to the absence of many foreign investors due to their markets’ closures on Easter Monday. However, the Fed’s role in the day’s bucking bull cannot be discounted.

With such a lousy jobs report, there can be little doubt of the central bank’s influence on stock prices as investors now expect a delay in a rate increase. This is a dangerous phenomenon since earnings should be investors’ sole focus.

As pointed out in an excellent Wall Street Journal article by E.S. Browning, there is not a lot of room for error.

Under “normal” circumstances, the current P/E of 18 times S&P 500 earnings may not be overpriced. But given the fact that much depends on the economy’s ability to recover from a soft winter, 18 times may be too rich, and it is doubtful it can be maintained.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/daily-market-outlook-mondays-rally-may-be-dangerous/.

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