The battle of VIX 13.50 was fought on Friday and by the end of the day, the bullish forces had prevailed in the sense that after the VIX chopped around on either side of that important number, stocks made a bit of a very late push in the final hour of trading which dropped the VIX below that support level as it ended with a closing decline of .13 down to 13.26, its lowest close since June, 2007 when the financial markets were still calm and moving to the upside ahead of the disastrous financial collapse that was lurking on the horizon.
The Dow began the day with a loss of 30 points as the November trade deficit widened by more than expected, which means that fourth-quarter G.D.P. is going to be revised lower and this was due to a surge of imported goods ahead of the holidays and also a large increase in imported automobiles. From those lows, things started to push to the upside and the Dow traded on either side of unchanged until that 3pm late upside acceleration which ended with a closing advance of 17 and which got the VIX to the level mentioned earlier. The S&P ended with a very nominal loss and even the Nasdaq got into the late upside act with a 4 point advance due to gains in AMZN, BIDU, CTSH, NFLX and PCLN, among others. Breadth numbers also pushed into the positive column at a 16/14 upside ratio after being negative for most of the session.
The Dow’s late advance came courtesy of good gains in IBM for whatever reason and from CVX, which made a positive pre-announcement. On the other hand, the financial issues weakened from their recent gains due to a negatively interpreted report from the first of the large banks to report, namely WFC.
The Euro advanced to a nine and a half month high on the statements made Thursday from E.C.B. President Draghi who said that he believes that the European economy should see some improvement by the end of the year and that there will be no further interest rate cuts as a result.
Despite further strength in the Euro, both crude oil and gold got sold off on a report from China that their inflation rate had risen to a seven-month high as a result of the coldest winter in 28 years in that country which has pushed up vegetable prices, heaven forbid, and which investors here are interpreting as a restraining factor on further monetary easing by their central bank. This caused crude oil, which has unfortunately been on a bit of an upside move lately, to ease back a bit, closer to $93 a barrel, and gold ended lower but finally was able to make a weekly gain after six straight weeks of losses for the first time in almost nine years.
And let it not be overlooked how the effect of the weekly options series worked its traditionally pernicious effect on certain important stocks, as the one named after a fruit did what it usually does on a Friday, now for the seventh straight time, namely go lower to hurt as many call option buyers as possible and Friday’s action in this one was a classic in the sense that the market makers did the old “pin to an even number” maneuver, where the stock miraculously settled right at a nice round number to hurt not only the call buyers of the stock but also the put buyers at that level as well, and 520 was the level at which the most damage would be done, and sure enough this is exactly where it ended, give or take a few cents. And what was spooky about this close was that not only did the stock fade down a couple of points in the last hour of the day while the overall market was improving but also in light of the sharp gap lower today, it is astounding that there are people who are so “smart” that they are perceptive enough to sell in advance of bad news.
Another stock that had a lot of action last week was HLF, as two hedge fund titans battled it out on the bearish and bullish side and the company itself held an investor conference in order to rally the troops behind it. This led to wild swings in both directions during the week and as those television touts would explain it, a “great way” to participate in the volatility is to buy either calls or puts depending on one’s outlook for this stock. So when all the damage was totaled up in the options world for this stock, 52,881 calls and puts expired worthless as opposed to only 8,687 that ended in the money, which means that 86% went out worthless, and this is what the buyers got for their troubles, a belated piece of coal in their stockings for Christmas.
After years of taking money out of stocks, which has been well-documented through various mutual fund statistics, people have decided that “stocks are finally expensive enough for retail investors to find them attractive”, as per one of the great comments ever that I saw last week. And as a result of the second straight week of gains to start 2013, $22 billion went into the market, with $13 billion going into ETF’s and $9 billion into traditional equity mutual funds. Of course, this is after years of investors pulling money out of equity mutual funds to the tune of $380 billion over the past few years as the S&P has made a more than 100% recovery from its March 2009 low, but ETF’s have attracted $200 billion while at the same time bond funds have brought in $1 trillion as investors have sought the “safety” of this type of investment. This is only the second time since the November 1973 to March 1975 recovery that investors sold stocks at the same time that the market was rising. Also, this was the largest amount put into mutual funds since the third week of September 2007, about a month before the S&P made its all-time high. But it was no surprise that money was overall pulled out of stock mutual funds as 65 % of them have trailed their benchmark indexes.
The market is mixed to lower today ahead of a busy week for earnings, with financial stocks in the report spotlight. There is a negativeness coming from the stock named after a fruit, which has been in a downtrend for four months now and today it got hit with a report that it lowered its iPhone production on slower demand. Now we know why some people were so smart on Friday to sell the stock off to its low of the day while the rest of the market pushed to its high of the day.
As this is being written, the Dow is ahead by a few points while the Nasdaq is lower by 16, courtesy of weakness in this one plus GOOG, while AMZN on the other hand makes a new all-time high. Financial stocks are lower for the second day ahead of many large banks reporting (see below). Breadth numbers are at a negative 13/16 ratio and the VIX is now back above that important 13.50 level with a .19 point gain to 13.55.
The Euro is continuing to push ahead at an 11 month high against the dollar, having gotten to 1.3400 before coming off of that level. This is despite new reports from the E.U. that industrial production and factory orders in November declined by more than expected for the third-straight month.
As was mentioned, this will be a big week for financial earnings, and the lineup is as follows: Tuesday: FRX, LEN; Wednesday – EBAY, GS, WEN, BK, OZRK, CLC, USB and Dow component JPM; Thursday – Dow components BAC and INTC, plus C, PNC, UNH, APH, BBT, BLK, COF and FAST; Friday – GE, another Dow component, plus JCI, MS, COL, SLB, STT, STI and XLNX.
Economic reports include: Tuesday – January NYState Empire Manufacturing Survey, December retail sales less autos, December P.P.I., November business inventories; Wednesday – December C.P.I., December industrial production and capacity utilization, January NAHG Housing Market Index, Fed Beige Book; Thursday – December housing starts and building permits, weekly jobless claims, January Philadelphia Fed Manufacturing Survey; Friday – initial January U. of Michigan Consumer Sentiment Survey.
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 Selkin