In a typical last trading day of the month, which more often than not makes the market go lower, as for instance even last year, which was a higher one for the major indexes, on seven out of the twelve final trading days of the year, the market ended lower. We have discussed many times over the years why this takes place, and one need only to look at the very late volume today and figure it out, as that right before the close further move to the downside had absolutely nothing to do with any fundamentals, it was just a question of maneuvering to cause the most discomfort for people who wanted to sell on the close. For instance, in the final three minutes, the Dow declined an additional 30 points to close 49 points lower, and did this move have anything to do with what was going on in the outside world, or was it just a chance for high-frequency traders and market makers to find a way to pick the pockets of more naïve investors?
In any event, things are obviously in need of a rest in any event, as the market cannot continue to advance at the rate at which it has in the first month of the year, and if it did, investors could quit their day jobs and just live off of the market largesse, which in a perfect world does not allow for. Nonetheless, the returns were impressive, as the S&P ended the month with a 5.1% gain, its best January showing since 1997 and its best one-month performance since October 2011. The Dow ended ahead by 5.8% while the Nasdaq advanced by 4.1%. Other averages did even better, as the Russell 200o Index of small caps rose by 6.2% but the real winner was the Dow Jones Transportation Index with a 9.4% climb for the month, its best January showing since 1991.
Similar to Wednesday, the Dow started out with a fast loss of 40 points, which turned into an equally fast gain of 30 right after the release of the better than expected January Chicago Purchasing Managers’ Index which rose by more than forecast. But then things began to ease off and by 11am the Dow went back into negative territory in which it spend the rest of the session, with that very late maneuvered collapse as mentioned causing it to close at its worst level of the session.
But the day was not entirely negative, even though the financial media will tell you that it was, as for instance breadth numbers were actually nominally positive at a 15/14 ratio and the Russell 2000, the mid-cap indexes and the Dow Transports all ended higher and even the Nasdaq ended just about unchanged after having been in nominally positive territory all day courtesy of earnings related gains in QCOM, CTXS and VIAB in addition to advances in GOOG, SNDK and JNPR.
There was also a good report on December personal income which rose by the largest amount in eight years, a gain of 2.6% but personal spending was slightly lower than expectations with a 0.2% advance. Weekly jobless claims rose by 38,000 up to 368,000 but this was not the survey week that will be used in tomorrow’s jobs report.
The Euro continued its remarkable streak of gains against the dollar, having now risen for six straight months from as low as 1.206 back in July when misplaced fears about the breakup of the common currency were rampant and speculators took a record number of bearish positions on it and how do they feel now, as it got as high as 1.360 yesterday, its best level since November 2011. For a nice change, this higher Euro did not cause either crude oil or gold to rise, as the former took a day off from its almost daily climb higher, and ended at $97.40, still too high for comfort and too close to the triple-digit level that will be anathema for stocks. Gold basically went back down to within what has become a long-standing and somewhat boring trading range. Treasury yields did settle below 2% for the 10-year maturity but are still at a nine-month high and obviously they are going to react one way or the other to today’s jobs report.
The VIX cooled off a bit and was nominally lower by .04 to 14.28 but is still very high relative to where the S&P is currently at compared to it being at the same level early in January when the S&P was 40 points lower.
Of the 252 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 4.4%, 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. It is also interesting to see this number slowly rise as the earnings period is moving along, which sort of justified the strong upward move that we have seen in stocks this year. The percentage of companies that has beaten consensus has been 65% over the past four quarters and 62% since 1994.
And what would my cynical old uncle say today to those who sold very late on the close yesterday (except for the stock named after a fruit of course) – “So, nu, what did you accomplish?” And this is another wonderful example of the “free market” at work, in other words, sell into the lows at the close and then buy back higher on the upward gap today.
After yesterday’s very last trading day of the month comedown to the lows, the various stock index futures traded higher right away to begin the overnight session, as if they “knew” that things would be better today and sure enough, even before the 8:30am release of the January jobs report, the Dow futures were ahead by around 55 points, indicating that things were going to go higher, and the jobs report did not disappoint in the sense that it came in just about on consensus with a 157,000 number, but the most bullish aspect of the report was the upward revision to the prior two months of November and December, which added an additional 127,000 more jobs than had been originally reported, which of course is another reason that these jobs reports should be released with a time lag. The unemployment rate moved up to 7.9%, but never mind, as the bulls really wanted to run with the headline number. There were also jobs gains in both the construction and retail employment sectors as well, and average hourly earnings rose as well.
This report resulted in a higher opening of 80 Dow points or so, which then shot up further upon the 10am release of three additional reports which got the bullish juices flowing further as well, and they were the final U. of Michigan Consumer Sentiment Survey which came in higher than expected, December construction spending which also rose more than forecast and the January ISM Manufacturing Survey which rose to its highest level in nine months. This triple-upside play resulted in the Dow gaining as much as 144 at its best level of 14,004, would you believe it, its highest reading since October 2007.
Breadth numbers are very strong at a 3.5 to1 positive ratio and the VIX is finally taking a downside beating, as it declines by a large 1.51 down to 12.77, in line with the current Dow gain of 141, and the battle for 14,000 will be fought all day. It is astounding that of the three Dow stocks that reported earnings today, two are lower – MRK and XOM, while one is higher- CVX, and the Dow is doing so well despite this. The strongest performers once again are the industrial cyclical components such as CAT, 3M and UTX, reflecting the strength in the ISM report.
And how about the lamest of excuses for why Treasury yields are actually declining on a day when the economic reports released are causing such a large rise in the stock market, and the supposed “explanation” is that the slight up-tick in the jobless rate removed the possibility of the Fed ending its asset buying program sooner. If this is not the lamest thing I have ever heard, then I do not know what is. In any event, the yield is nominally lower to 1.97%.
And just to show how ridiculous the bond “explanation” is, how about the fact that the Euro continues to explode to the upside, now at 1.37, its highest since November 2011 on the overall strong reports today which means that appetite for risk has increased, which one would think would augur for higher interest rates, but never mind. And naturally crude oil and gold could not resist the upside fun and games as they are both up a bit as well.
I had mentioned that the strange recent rise in the VIX recently, when it went from its yearly low of 12.43 on January 22nd to its recent high of 14.32 on January 30th at the same time that the S&P rose from 1492 to 1502 was a foolish VIX rise in the sense that it was allowing the market room to rise even further, which is exactly what we are seeing today, but one would also like to think that the upside for stocks is going to get limited once again as it is now has a 12 in front of it, approaching its ultimate downside support level at 10.
Next week’s earnings lineup includes Dow component DIS on Tuesday, along with ZNGA; Wednesday – BIDU; Thursday – PM; Friday – AOL, among others.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 3.7% 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 14.7 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 had 12 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter this year except for the fourth-quarter, and today’s lower number broke this streak, but the number is still subject to revision. G.D.P. now has risen by 2.2% in 2012, and is projected to increase by 2% next year, according to various surveys.
Donald M. Selkin