Should you believe the iron ore and oil rally?

The rise in two key commodities — oil and iron ore — has profound implications for the stocks of the companies in those universes.

This has obvious implications for earnings, particularly for energy and materials, but it has also dramatically decreased worries about an out-of-control deflationary spiral.

Look at iron ore, which has gone straight down for two years, to about $40 a ton at the end of February from about $140 a ton. Now, in the space of roughly five trading sessions, iron ore has gone from $40 to $60 on optimism for greater Chinese steel demand (the National People's Congress over the weekend announced a higher than expected growth target of at least 6.5 percent for the next five years), and the ever-present hopes for more stimulus.

For a company like Cliffs Natural Resources , which has roughly a fifth of its revenues from China, the implications are profound: a 50 percent increase in the price of its main commodity will make it much easier to service its $2.3 billion debt load.

It's hard to understate the turnaround in metals: a month ago, CLF was was looking like it was going to trade under $1 — in other words, it was looking like it was going out of business. Today, it's about $3.30, still pretty poor but an astonishing recovery in a month.

Paradoxically, a higher price for its stock — it's up 60 percent this month — may make it more likely they will issue additional capital to service that debt load.

Is this the bottom? The analyst community is certainly not terribly enthusiastic, and with good reason. Just this morning Morningstar's metals analyst David Wang had this to say: "The recent rally in iron ore and miner share prices should prove fleeting, as it stands on weak foundations and does not reflect the deteriorating fundamental outlook for the commodity."

Wang believes iron ore prices will again decline because the market is misreading the signals from China: the announced 6.5 percent growth target is not attainable, he believes.

Of course, there is always hopes for additional stimulus, but what's the effect of throwing more money at companies that are losing money to begin with, even if they are producing more? Adding more debt to losing companies doesn't sound like a winning idea in the long run.

So, I get the argument about not getting too enthusiastic. Regardless, the ferocity of these rallies in iron ore and oil and clearly indicate that:

1) there was an enormous short base in the equities associated with these commodities, and

2) those shorts are clearly betting that some kind of bottom has been put in, even if only for a few months.

You can make the same case with exploration & production (E&P) stocks. Oil is up another 5% today, and has rallied almost 40 percent since the Feb. 11 rally.

A company like Murphy Oil, which gone straight down in the last 18 months or so, from $65 to roughly $15 in the beginning of March, is at $27 today, an 80 percent rise in a few trading sessions.

The Exploration & Production ETF has rallied nearly 25 percent in the last five trading sessions. That is not normal.

They are saying the same thing about oil that metal stocks are saying about iron ore: some kind of at least an intermediate-term bottom has been put in.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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