We now have had the strange occurrence this week where on the first two trading days the major averages declined along with the VIX, and yesterday the major averages ended higher and the VIX rose as well. This of course goes completely contrary to what is “supposed” to happen in the relationship between these two items, but the net moves have basically been minor as the 13.50 support level on the downside seems to hold on a closing basis even as this level is broken intraday, as what took place yesterday.

After two days of losses to start the week, the Dow started out with a nice gain and reached its best level of the day with an 88 point advance at 11:50am, from which point it underwent a lower choppy pattern to reach its worst level of the day with a 32 point gain at 3pm, from which it got a second upside wind to finally close with a 61 point advance and breadth numbers were solid at a 20/9 positive ratio.

Of course, as I have mentioned before, the obsession with the first Dow stock to report reached a fever peak with the endless over analysis of a company that should probably not even be in the Dow in the first place, having lost 80% of its value over the past several years. In any event, just like I predicted, AA gained a rousing .20 cents at its best intraday level apparently because its revenues came in better than expected. But sure enough, all of this hype went for nothing as after all the endless blah, blah about what this company supposedly means for the world economy, its shares retreated back to end with a .02 loss. But this did not stop financial organizations from using this company’s report in trying to justify why the market finally ended higher after two down days. Such headlines like “Wall Street rises after AA reports earnings”, and stocks were higher because of “optimism about fourth-quarter earnings”, completely miss the picture, because fourth-quarter projections have been steadily lowered from a 10% predicted gain back in October to the current 2-3% gain projected at the present time.

And in a complete reversal of the day before when industrial type stocks accounted for half of the Dow’s decline, yesterday the three that had declined earlier in the week accounted for half of the gain, and this group included BA, 3M and UTX, the former being particularly volatile due to safety concerns with its new Dreamliner 787. On the other hand, the financials, which had been doing really well lately, decided to take the day off and their weakness accounted for the lower close relative to where things had started out.

And talking about the VIX, it did what it has done for several years, namely refuse to break below that 13.50 support level on a closing basis. As an example, when the major averages were on their best levels of the session, the VIX got down as low as 13.22 but then worked its way back up a bit to close higher, with a nominal gain of .19 to 13.81, which would be no big deal in and of itself, but the fact that it took place on an up-day in the market made it a strange event.

The market started out higher for the second straight day today due to some encouraging overseas news, as China announced that both its December exports and imports were much stronger than expected, the former rising by 14.1% while the latter gained 6% and these were seven-month highs and as we all know, since China is perceived to be the engine for world economic growth, when news comes out of that country, many markets make a reaction to it. In addition, there was ostensibly good news from Europe as well, as E.C.B. President Draghi pronounced that he sees a “gradual recovery taking place later this year”, and for what that is worth, this also gave investors here reason to buy.

As a result, the Dow reached a 54 point advance at its best 10:10am level, from which it proceeded to plunge to a fast decline of 8 points at 11:15am and then started to recover once again, with strength in the financials and energy stocks helping. As this is being written, it is ahead by 34 points but once again the Nasdaq is lagging with only a 2 point advance, and even that has been labored to say the least, as once again the stock named after a fruit goes lower even when it goes higher, as Casey Stengel would have said. In other words, after a 12 point higher opening gap, it steadily declined as the day moved along to get to as low as a 1 ½ point decline and this comes supposedly because one of the most stubborn bullish analysts out there grudgingly took his price target down to 875 from 900 as the stock has plunged by 200 points these past few months. So in other words, when the market is saying that perhaps these absurd projections might not be reached, he comes along and lowers his price target a bit after this 200 point decline. And if this isn’t the most co-incidental aspect of this type of recanting their wildly bullish outlooks, other analysts have also lowered their outlooks, always at the end of the week. This means that those investors who feel that purchasing weekly calls is a good strategy with this stock, when it is the worst possible strategy of all because even during the glory days earlier this year, there were always one or two down-days late in the week to assure that the majority of calls would expire worthless, will once again go down with the ship, so to speak. And it certainly appears to be the case once again this week as well.

The VIX is finally doing what it is supposed to do, namely decline on an up-day and it is lower by .22 to 13.58 relative to that 34 point Dow advance, so it will be crucial to see if it can break below the 13.50 support level on a closing basis which would appear to have to occur if the major averages can extend their gains. On the other hand, if things fail at current levels, then the validity of this support level will have been confirmed once again.

First-quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 2% gains for the fourth-quarter are projected at the present time, in addition to a gain of 6% for the first-quarter of 2013.

The S&P trades at 13.6 times the projected 2012 earnings of $102, according to the analysts who follow these companies, which could still support stocks. Earnings were $85 in 2010 and were $92 in 2011. The estimate for 2013 is $108, a gain of 6%. The average P/E multiple for the S&P going back to 1954 has been 16.4.

After four consecutive quarters of negative G.D.P. growth, we now have 12 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010 and every quarter in 2011, and every quarter this year as well. For 2011, G.D.P. rose at 1.7% and it is projected to grow by around 2.2% in 2012, and by 2% next year, according to various surveys.

Donald M. Selkin


Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}. It is possible that at any given point in time, the author, NSC, or one or more of its employees or registered individuals associated with NSC, may hold a position, either long, or short, as well as options, bonds, or other instruments in the companies noted in this report. This Market Letter is intended strictly for current National Securities Corporation customers only.