It almost seemed as if Friday’s large gains were a media-type event in the sense that the market wanted to close above Dow 14,000 at a five-year high and the S&P also closed at its best level in five years as well, and the Russell 2000 Index of small stocks and all of the other small and mid-cap indexes closed at their best levels ever to make sure that the financial media over the weekend would have a field day telling everyone how great the market is and the fact that the individual investor, who watched the S&P more than double from the March 2009 low, has now decided to pour money into the market with the strongest four-week flows into stock funds since 1996, as equity mutual funds and ETF’s have raked in $34.2 billion during that time. And inflows have now occurred for five straight weeks. Of course, this is still a fraction of the $410 billion that was withdrawn from equity funds since 2008, but the experts had to come up with some justification for why the S&P closed out its best January performance since 1997 and its best one-month performance since October 2011.
The market was so convinced that things were going to do better than even before the 8:30am release of the January jobs report, the various stock index futures were higher, indicating around a 55 point Dow advance. Then when the numbers themselves were released, the futures got even better and as a result the Dow started out the session with an opening upside gap advance of 80 points, which then got as high as 149 points at its best closing level to 14,009 and the Dow was able to stay around this round-number 14,000 level for most of the session after the 10am release of other reports which were interpreted as friendly for stocks as well.
The reports that ostensibly gave the market the upside push that it exhibited were firstly the non-farm payrolls report which 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.
What gave the market that further upside push as mentioned above 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. And interestingly enough, after the10am release of these reports, the Dow basically never really went too much below 14,000 before making that further additional upside push as previously described.
This was the highest close for the Dow since October, 2007 and convinced all of the experts that record highs, another 165 points away, were just around the corner. Breadth numbers were very strong at a 3.4 to1 positive ratio and the VIX took a downside beating of 1.38 points to 12.90, getting closer to its new support level of 12.30, which had to be somewhat of a warning sign that not everything would continue to come up roses, as today’s market action is certainly giving a reality check to the inevitable onward and upward bullish pattern.
The Dow advance was even more remarkable in the sense that it was accomplished despite a selloff in component MRK after its earnings and also XOM doing absolutely nothing all day when it traded primarily in the minus column before the overall upward move of the market pulled it into the very nominally positive column just before the close. The Nasdaq rallied 37 points due to a new all-time high in GOOG and good gains in ORCL and ISRG, but once again the stock named after a fruit closed a bit lower and if it could not advance on such a powerful up-day like Friday, then what is it supposed to do on a down day like today?
The yield on the 10-year note started out lower for whatever exotic reasoning was put forward, but then did what one would expect it to do when the risk-on trade with equities and the Euro and crude oil was in full force, and finally ended at 2.02%, a nine-month high on the stronger economy scenario. The Euro was also feeling it on the upside with its best advance to the highest in 14 months against the dollar with a 1.364 close and even crude oil could not resist the temptation to add to what I believe are its unjustified gains, which has resulted in the highest gasoline price ever at the start of any February, so how is this supposed to help consumer spending along with the negative implications of the lower take-home pay that wage earnings up to $113,700 are going to see due to the increase in social security deductions?
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 to those who think that the market can only go up, today is the first reality check to that thesis, as the bullish cheerleading over the weekend in the various financial media was a bit much to take, and with the VIX with a 12 in front of it on Friday, even the intern class from Queens College that I made a presentation to voted by a majority that things would most likely have to come down today.
So now after everything was great ad infinitum after the Dow closed over 14,000 and the S&P closed at a level from which it has always declined, what happened to cause the largest selloff of 2013? And for want of anything better, market experts pointed to the fact that the December factory orders report came in below consensus, when in fact a negative fourth-quarter initial reading for G.D.P. was something to just ignore. So now something more dramatic had to be found for the selloff, and oh, no, after having been forgotten for months, good old Spain and Italy were dragged back into the discussion, as one financial service mentioned “rising political tension” in both countries and higher yields in both places is also being offered as the reason why stocks here are selling off, and why didn’t they add to it the old Super Bowl indicator that says when the A.F.L. wins, the market declines 76% of the time for the year, and this indicator has been correct for 35 out of the 46 games played so far, and how do you like that!
The Dow is currently lower by 125 points and breadth numbers are the exact opposite of what they were during Friday’s upside euphoria, at a negative 1 to 3.5 ratio and once again the VIX is feeling it on the upside, with a large gain of 1.58 to 14.48. The bond market came is finally coming down from a nine-month high to 1.97% for the 10-year on the old flight to quality buying, which of course comes as a corollary of the lower stock market. And the only good thing that is coming out of today’s session is that oil prices are finally coming down closer to reality, with a drop of $1.50 a barrel to $96.30, and I believe that they are still higher than they should be.
And another very high item, namely the Euro, is also coming back down to reality with its largest decline in three weeks on the supposed “political turmoil” in that part of the world. This is the result of the Spanish Prime Minister being accused to taking illegal cash payments and disgraced former Prime Minister Berlusconi narrowing the gap with the front runner despite the fact that he is appealing a four-year prison sentence for tax fraud, and as they say, what do you expect in that part of the continent? And if these allegations came out on Friday, would the market have risen as strongly as it did on what seemed to be the obsessive goal of market makers to force the Dow over 14,000? The common currency is now down to 1.354.
This week’s earnings lineup includes: tonight – BIDU, YUM and APC; Dow component DIS on Tuesday, along with ZNGA CMG, PNRA, SFLY, UBS, ADM, ADP, ALGN, EL, TTWO; Wednesday – V, CVS, MRO, RL, TWC, AKAM, ALL, GRCR and CMI, Thursday – PM, CTSH, S, NYT, OPEN, LNKD and HAS; Friday – AOL,TM and CBOE
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