What's behind the global rally?

A trader works on the floor of the New York Stock Exchange.
Adam Jeffery | CNBC
A trader works on the floor of the New York Stock Exchange.

TheMonday rally was stronger than most traders expected. Whenever this happens, it pays to take a look at the trading action and try to determine what hypothesis best fits the facts.

Here's what I see:

China: gaps up, ends near high

Germany: gaps up, ends at high

U.S.: gaps up, highs for day

Hmm, there's a pattern here, and it's clearly global in nature. Comments from the People's Bank of China official that China has "room to act" in combating deflation and slow economic growth is yet another sign that some type of stimulus is coming.

And confidence indexes were strong in Europe, indicating that the ECB is having some kind of influence on investor attitudes.

Here in the U.S., three or four healthcare deals don't hurt, neither does much better than expected February pending home sales.

But still, is that it?

I think there's another crucial factor: it's the end of the quarter, with a lot of outperformance and underperformance. Just look at the performance spread between some of the S&P sectors:

Sectors, year to date

Healthcare—up 7.7 percent

Consumer Disc—up 5.1 percent

Industrials—down 1.0 percent

Energy—down 2.8 percent

Utilities—down 5.7 percent

This is for just one quarter, not a full year.

I look at the trading in the U.S. in the last week, and it sure seems like some people are moving some stocks around...buying losers (energy, some industrials) and lightening up on the winners (biotech).

It makes perfect sense to buy underperformers going into the end of the quarter, particularly if you think they have put in some kind of bottom.

This drop in energy stocks is the classic buy-the-dip. Traders simply refuse to believe that oil will remain in the $40s for any length of time.

There have been attempts to buy dips in energy ETFs like the S&P Oil & Gas Exploration ETF, where we saw volume spurts when oil dropped in January and mid-March.

Here's another seasonal factor: April starts on Wednesday, historically the best month for the Dow, up 1.9 percent on average since 1950, according to the Stock Trader's Almanac.

One final observation: traders have been waiting for this mythical 10 percent correction for several years, and it still seems a ways off, despite lower earnings and a Fed poised to raise rates sometime this year.

I do anticipate that the Fed tightening will have a dampening effect on stock multiples (the S&P is currently at roughly 17 times forward earnings, a bit high), but if it's just one rate hike this year, is that going to tank the market?

Not likely. Instead, choppy trading is the most likely path, flat for the year.

And if rate hikes are going to be slow and moderate, and economic growth is steady buy subdued, why not go back and focus on dividend payers, like everyone did last year?

My biggest worry remains the down earnings projections for Q1 and Q2. But, let's assume this is a washout year for earnings. If that's true, it's perfectly reasonable to expect sloppy sideways trading.

But once companies start increasing earnings projections next year, guess what happens? Anyone for a late-year rally?

  • 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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