Traders jumped on an end-of-the-quarter bandwagon Monday, sending stocks sharply higher and casting doubt on predictions that the Federal Reserve will cut interest rates aggressively at a meeting next week.
The Dow Jones industrial average rallied by more than 200 points, and the benchmark Standard & Poor’s 500 index closed above the 1000 mark for the first time in nearly a year.
Analysts said the move was sparked by a much better-than-expected report on business conditions among New York state manufacturing companies.
The monthly report by the Federal Reserve Bank of New York is only two years old and does not carry great weight among economists.
Still, the Empire State Survey of Manufacturing tends to predict the results of a much more widely watched monthly report by the nation’s corporate purchasing managers.
Equity mutual fund managers, facing second-quarter reports, appear to be jumping on board the rally, analysts said.
But Brian Singer, managing director for asset allocation at UBS Global Asset Management in Chicago, said the recent rally may be overcooked. Singer directs strategy for more than $80 billion.
Early this year, erosion of equity values overseas made the U.S. stock market look good by comparison, he said.
Moreover, “there has been a shift in the perception toward the [U.S.] economy to a view that the economy is beginning to show some strength or at least not the weakness we had feared,” he said.
But U.S stock prices may be too optimistic, he said. Overcapacity in many industries and the need to clean up corporate balance sheets cast doubts on the rally’s durability, he said.
“We’ve been overweight in equities; we’re shifting to the other side now,” he said. “I think [the U.S. stock market] is probably going to get ahead of itself, and I’m more than happy to lean against it.”
On a more technical level, Monday’s advance may reflect moves by traders to adjust their positions ahead of Friday’s expirations of stock-related options and futures contracts–the so-called triple-witching expirations once every three months.
Maria Grant, an equities derivatives strategist at Goldman Sachs, said she did not detect expiration-related activity in Monday’s market.
But Fane Lozman, chairman of market monitoring service Scanshift.com, said Mondays before options expirations have become more volatile.
On March 17, the Monday before the first-quarter triple witching Friday, the intraday range of the Nasdaq composite index was 66 points–the widest range so far this year–suggesting intense trading tactics.
The Nasdaq jumped nearly 4 percent on March 17. On Monday, the index gained 40.09 points, or 2.5 percent, to 1666.58.
The Dow Jones industrial average rose 201.84 points, or 2.2 percent, to 9318.96, the highest close since July 5. The Dow closed at its high for the day, suggesting buying pressure may persist into Tuesday.
All 30 of the Dow industrials posted gains, led by 3M, Caterpillar and International Business Machines.
The broader Standard & Poor’s 500 index closed just short of its high for the day, up 22.13, or 2.2 percent, to 1010.74.
Drug giant Pfizer led the S&P 500 gainers, adding $1.52, to $34.60, on new research results showing that its Lipitor medicine to fight cholesterol reduced chances of strokes and heart attacks among patients with Type II diabetes.
Among Nasdaq stocks, Microsoft and Intel advanced in heavy trading.
The Russell 2000 index of small-company stocks closed at its high for the day, up 7.76, or 1.7 percent, to 457.47.
New York Stock Exchange trading volume reached 1.31 billion shares, an average volume level in recent sessions. Winning stocks outnumbered losers by a nearly 3-to-1 ratio among NYSE-listed stocks.
Nasdaq trading volume totaled a moderate 1.89 billion shares, as winners topped losers by less than a 2-1 edge.
Treasury securities closed lower in the face of the stock market advance.
In turn, the New York Fed report eroded optimism that the Federal Reserve would slash its short-term interest rate target by a half-percentage point at a two-day monetary policy meeting set for next week.
Some economists have been predicting such an aggressive move by the Fed in light of the sluggish economic rebound and fears of deflation.
The current target rate for overnight loans among banks, called the fed funds rate, is just 1.25 percent.
Oil and natural gas prices closed higher.
Treasury auction: Interest rates sank at Monday’s weekly auction of 3- and 6-month Treasury bills. The discount rate on 3-month bills dropped to 0.84 percent, down from 1.00 percent last week. The rate on 6-month bills fell to 0.84 percent, down from 0.98 percent last week.
The coupon-equivalent investment rates at Monday’s auction were 0.85 percent for 3-month bills and 0.86 percent for 6-month bills.
