The market's illogical rally

Despite a slew of layoff announcements, stocks were up Monday as investors focused more on a big merger and hopes that the worst may be over for banks.

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By Paul R. La Monica, CNNMoney.com editor at large

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NEW YORK (CNNMoney.com) -- It should have been an ugly morning for the markets.

Home Depot (HD, Fortune 500), Caterpillar (CAT, Fortune 500), Sprint Nextel (S, Fortune 500), John Deere (DE, Fortune 500) and ING (ING) all announced sizable job cuts. This is further proof that this recession is hitting all sectors of the economy and all areas of the globe. It is not good news.

But stocks didn't plunge Monday morning despite all this doom and gloom. In fact, the Dow gained more than 100 points in early trading while the S&P 500 and Nasdaq both shot up about 2%. Say wha? (Stocks pulled back from those highs and were briefly trading lower Monday afternoon. But they recovered and were still up modestly heading into the close.)

The layoff news may have been tempered somewhat by Monday morning's announcement that Pfizer (PFE, Fortune 500) was buying rival drugmaker Wyeth (WYE, Fortune 500) for about $68 billion.

The merger is the biggest in nearly three years and could usher in a wave of consolidation in the healthcare sector. It may also signal cash-rich companies in other industries to take advantage of fallen stock prices and make some purchases of their own.

"Even with all the negative news on the unemployment front, the Pfizer deal shows that companies are signaling there is some value in the market here," said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, an investment research firm based in Shrewsbury, N.J.

Bank stocks, which have been hit hard so far this year due to fears of rising losses and nationalization speculation, also skyrocketed higher early Monday morning.

It appears that investors may have been reassured by the news from beleaguered British bank Barclays (BCS), which said Monday morning that it posted a profit in 2008 despite massive writedowns and that it would not need new capital.

Shares of Barclays U.S.-listed stock surged nearly 60% and several large beaten down U.S. banks, such as Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500), all rallied as well Monday morning (Those three stocks dipped from their early morning highs as the day wore on though.)

Finally, two bits of economic data were released Monday morning - and each was better than expected. The Conference Board's leading indicators rose 0.3% compared to the 0.2% drop economists were forecasting. Even more surprisingly, existing home sales rose 6.5% in December.

So even though the slew of job cut announcements paint a picture of an economy that's still ailing, there were at least some faint signs of hope on the horizon.

And after months of reading nothing but negative headlines, one market strategist suggested that investors may be nearing a point where even the slightest bit of good news could spark a rally.

"We have almost become immune or desensitized to the bad economic news out there. It has been a long time that the market has had even a decent bit of good news," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala.

Still, it's premature to say that Monday's morning rally is an indication that all the bad news is already priced into the market. There have been plenty of head-fake rallies in the past few months.

"This is indicative of a bear market rally. They are illogical," said Phil Dow, director of equity strategy RBC Capital Markets in Minneapolis. "There is not enough good news for a sustainable run in the long-term. It's a temporary patch of blue."

Dow added Barclay's encouraging news should not be interpreted as the end of the financial sector's woes.

"Do we really think we are out of the woods with bank problems? I don't," he said.

So don't read too much into Monday's move. While it's nice to see the markets up despite a lot of bad news, investors still have much to be concerned about regarding the health of the economy.

Along those lines, Roberts said that what happens in Washington, D.C., over the next few weeks - not more mergers or layoff news - will be the biggest factor influencing the market in the short-term.

"The big question mark is the Obama administration. Right now, everybody is waiting to see what exactly the stimulus package will look like and what will happen to it in Congress. So the market could be bottoming until we get more news about that," he said.  To top of page

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