Was the Japan Rally a Positive Omen for Earnings?

Stocks pulled out of their slump on Monday afternoon on hopes that the Japanese rally could be a positive omen for earnings season.

There was no economic data from the United States on Monday which would have given stocks momentum in either direction. Although the stock index futures were in positive territory ahead of the opening bell as a result of the Japanese rally, the Dow spent the morning in the red, while the S&P 500 and the Nasdaq struggled at the break even level. By 2:00 p.m., all of the major indices had established some momentum.

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Although some commentators attributed the bullishness to the onset of earnings season, most analysts are expecting a weak quarter. The most likely explanation is bullishness about the outrageous rally that has been going on in Japan for the last four trading days.

The Dow Jones Industrial Average (NYSEARCA:DIA) rose 48 points, closing at 14,613 for a gain of 0.33 percent. The S&P 500 (NYSEARCA:SPY) advanced 0.63 percent to close at 1,563.07. The Nasdaq 100 (NASDAQ:QQQ) climbed 0.52 percent to 2786, while the Russell 2000 (NYSEARCA:IWM) surged 0.85 percent to 931.

In other major markets, oil (NYSEARCA:USO) recovered some ground on Monday, climbing 0.63 percent to close at $33.49.

On London’s ICE Futures Europe Exchange, June futures for Brent crude oil advanced 73 cents (0.70 percent) to $104.88/bbl. (NYSEARCA:BNO, NYSEARCA:USO). June gold futures declined by $3.50 (0.22 percent) to $1,573.40 per ounce (NYSEARCA:GLD). Transports were in the driver’s seat on Monday, with the Dow Jones Transportation Index (NYSEARCA:IYT) zooming 0.93 percent.

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European stock markets had a positive day, while Japan’s Nikkei 225 Stock Average extended its huge winning streak to a fourth consecutive day, skyrocketing 2.80 percent. The Shanghai Composite Index (NYSEARCA:FXI) declined 0.62 percent to 2,211. Hong Kong’s Hang Seng Index (NYSEARCA:EWH) dipped 0.04 percent to 21,718 as a result of ongoing concerns about the potential consequences of the bird flu.

Technical indicators point to an overbought market with declining momentum near significant long term resistance lines. The S&P 500 MACD remains below the signal line, suggesting a further decline. Its Relative Strength Index picked up to 56.88.


For the day, major sectors finished solidly in positive territory, although health care barely made it out of the red in time for the closing bell.

Consumer Discretionary (NYSE:XLY):  +1.14 percent


Industrials (NYSE:XLI):  +0.59 percent

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Materials (XLB):  +0.37 percent

Energy (NYSEARCA:XLE):  +0.67 percent

Financials (NYSEARCA:XLF):  +1.00 percent

Utilities (XLU):  +0.76 percent

Health Care (NYSEARCA:XLV):  +0.02 percent

Consumer Staples (NYSEARCA:XLP):  +1.08 percent

Bottom line: Bullish sentiment about the onset of earnings season hardly seems to be the reason for Monday’s stock market advance, because analysts are expecting weak earnings reports for the first quarter. The only source of bullishness on Monday was Japan, which saw the Nikkei 25 Stock Average skyrocket 2.80 percent. 

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John Nyaradi is the author of The ETF Investing Premium Newsletter.

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