How could it be, how could it possibly be, that the Dow and the S&P actually had the nerve to finish the day slightly lower yesterday, after having closed last Friday at their highest levels since October and December 2007 respectively? And it was not for a lack of trying either, as the Dow began the session with a 20 point gain, helped by a strong December durable goods order report that rose by more than expected. But heaven forbid, when the December pending home sales report came out much lower than forecast and actually showed a decline, the Dow turned tail to the downside and reached its low of the day with a 33 point loss at 10:15am, from which level it turned back up again and chopped around in a very narrow range on either side of unchanged before finally ending with a 13 point closing loss. The S&P also closed lower, losing 3 points at the end.
But in a miraculous turn of recent events, the Nasdaq decided that it did not want to continue to be the laggard, at least for one day, as it actually had the nerve to end with a closing gain of 5 points led by none other than the stock named after a fruit, which underwent some very bizarre trading on Friday’s close as was mentioned in yesterday’s daily market notes and even yesterday it traded down to the same low as it did late Friday, which gave more bearish investors the privilege of selling out at 435 again before the stock finally decided that enough was enough on the downside after 270 lower points and it actually rallied in a solo performance to carry the day for the Nasdaq. And it was a solo performance because many of the large leaders who had been doing extremely well lately decided to take the day off, and this group included AMZN after its all-time high last Friday, NFLX, which had rallied an astounding 71% in the three days after its earnings report before finally inducing the last buyer to come in and pay 177 for a stock that had been 103 last week before it too ran out of gas, along with other recent high-fliers such as PCLN as well. And continuing on this revenge of the nerds theme for the Nasdaq, another beaten-down stock finally decided to do a little better, and it was BIDU that helped as well, along with ORCL, which has been doing very nicely lately.
And once again, the sector analyst community has come out looking very bad in regard to the shares of AAPL, as they were cheerleading it higher as the stock was on its amazing 2010 to September 2012 move higher, especially as it accelerated to the upside early last year. And when its decline began to accelerate lately, they all lowered their price targets after the fact, and one of the financial shows actually had the nerve to feature an analyst who was very bullish on the stock at 600 but turned bearish yesterday as it hopefully hit the bottom after correcting lower by 38%. And what makes this such an embarrassment for these analysts is that for instance on the Yahoo Finance website, virtually every comment from the investing public in regard to this analyst who threw in the towel at the low after being bullish at higher prices was that – they fall in love with it at the highs and then tell you to sell at the lows.
Breadth numbers were negative at a 12/17 ratio and the Dow would have done worse had it not been for a strong earnings-related performance from component CAT after it strangely sold off sharply on Friday ahead of its better numbers, as it alone contributed 14 positive Dow points. But hurting the Dow was a weak day from two groups that have done extremely well this year, namely financials and energy.
And how about those good old 10-year Treasury note yields, which have now risen to their highest level since April at 1.97% on the perception of a strengthening economic recovery as reflected by a higher stock market. The Euro sort of took the day off, but crude oil, which had the nerve to decline a bit last week, cannot be happy unless it is rising and it pushed up to $96.50 a barrel and what good is this going to do for the consumer? Gold, on the other hand, continues to remain in the doldrums as it is losing its supposed safe-haven appeal as investors feel more confident going into equities.
And a word must be said again about the bizarre behavior of the VIX over the past four sessions, as it ended at 13.57, a gain of .68, which means that it has risen from 12.43 at the same time the S&P itself has gone higher from 1492 last Tuesday to its close at 1500 yesterday.
So we have now seen another strange occurrence going on here, as both the S&P and VIX have risen for the past four days net, which means that someone is going to be wrong here. Either the market is about to put in a near-term top or that the higher level of the VIX is going to allow for further upside to new highs for the move, which might not happen after the almost uninterrupted advances so far this year and the new-found bullishness of individual investors with their sudden re-discovery of stocks after shunning them while the market more than doubled from its March 2009 lows.
After taking the day off yesterday, the market is back to its typical 2013 pattern, which means that it starts off doing nothing and then accelerates as the day moves ahead, as for instance the Dow opened around unchanged, then rallied 35 points before setting back to unchanged after a very weak January Consumer Confidence report, the lowest since November 2011 on the consumer disgust over lower take-home pay on the increased social security tax deductions from their gross wages. But never mind, as a strong November CaseShiller Home Price Index, which showed the best yearly gains since the housing market topped out in 2006, a 5.5% advance in 2012, got the bullish juices flowing once again, as the Dow got as high as a 66 point advance at 12:45pm and is currently ahead by 60 as this is being written. And as has been the recent pattern as well, the Nasdaq is lagging as it is currently lower by 3 points and one cannot blame the stock named after a fruit, as it has now has the nerve to be higher for two straight days after its 38% downside journey and its lowering of price targets after the fact by the analysts as mentioned above.
The blame for the weak overall technology showing is from poor reports from technology stocks that are not even in the Nasdaq, but never mind, as BMC, EMC, STX and VMW are all getting blasted to the downside after coming up short. This is affecting most of the Nasdaq technology issues, as AMZN is now lower for the second day after reaching a new all-time high last Friday and ahead of its report Thursday night. Same is true for ISRG and PCLN after their recent magical-mystery upside tours as well.
Breadth numbers are nominally positive at a 16/13 upside ratio and the VIX is finally lower after those bizarre four straight up-days even as the market was moving higher as well, and even today when things opened around unchanged, it jumped out to a fast gain of .31 to 13.88 before finally coming down as the Dow and S&P have steadily improved as mentioned above. It is now lower by .44 to 13.13, still above its new support level of 12.30, which means that the market still has room to advance.
The Dow is being helped by a good report from component PFE and carryover friendliness from CAT and PG, both of whom recently did well on their reports and are continuing to move higher. On the other hand, F is getting blasted to the downside after it reported a wider than expected loss in its European operations after beating the overall number. And energy stocks are higher once again after taking yesterday off on a good report and new high in the shares of VLO.
And how about the much-maligned Euro, which has now reached its best level since December 2011 at a price of 1.3500 and naturally this is helping crude oil to continue to get dangerously close to that triple-digit number from which it has always had a negative effect on stocks, as it could not stand to be left out of the upside party, with a gain to $97.50 a barrel, the highest since last September.
O the 175 S&P companies that have been reported so far for the fourth-quarter, 71% of them have beaten the consensus and earnings are now projected to be ahead by 3%, better than the 1.9% projection at the start of the reporting period but well below the 10% that the experts thought would be forthcoming last October. The percentage of companies that has beaten consensus has been 65% over the past four quarters and 62% since 1994.
And if one wants to see a change, the Dow Jones Transports are actually lower after having been higher for 10 straight days, an astounding performance as a poor report from JBLU is exerting some downside pressure.
This week sees the continuing earnings parade, with – tonight – BRCM; Wednesday: Dow component BA, plus FB, QCOM, TLAB and WEC; Thursday: AMZN, AET, K and VIAB; Friday: Dow components CVX, MRK and XOM, plus LVS, MAT and SFLY.
This week will also see the January jobs report on Friday, adding to the drama of the earnings season which will be peaking by the end of next week. We also get the results of the latest F.O.M.C. meeting on Wednesday at 2:15pm and when is the last time that the market rallied on one of those? In between these two big ones we get: Wednesday – first estimate of fourth-quarter G.D.P.; Thursday – weekly jobless claims, December personal income and spending, January NAPM Milwaukee Purchasing Managers Index, January Chicago PMI; Friday, in addition to the jobs report (current estimate is 161,000), we get final January U. of Michigan Consumer Sentiment Survey, December construction spending, January vehicle sales and January ISM Manufacturing Survey.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 3% gains for the fourth-quarter are projected at the present time, in addition to a gain of 3.5% for the first-quarter of 2013.
The S&P trades at 14.6 times the projected 2012 earnings of $102, according to the analysts who follow these companies. 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
