Faced with the possibility of a lower weekly close for the first time this year, the major averages would have nothing to do with that, and as a result, the Dow opened with a 40 point gain on Friday, which eventually reached its best intraday level with a 78 point advance at 10:40am, before it underwent a bit of a sag to reach its low of the day with only a 16 point gain at 3:40pm. From that level, it decided to push back to the upside once again and ended with a 49 point closing advance, shooting up by a good 15 points right on the close in what had to be a sort of blizzard Nemo maneuver in what was obviously a very thin market, which of course is the primary reason why these very late advances had to be taken with a grain of salt, and certainly more of this substance should have been used earlier in order to get the Long Island Expressway up and running before it in fact was. This is why the Dow is giving back those very late maneuvered gains, especially in the shares of XOM, which rose by much more than they should have right on the close and are giving those gains back today.
The VIX declined to below 13 when the Dow was at its best morning level as described above and finally ended with a closing decline of .48 to 13.02, which is exactly the amount that it should have fallen relative to that Dow gain. Breadth numbers were at a positive 20/9 ratio and the Nasdaq actually did better once again due to the stock named after a fruit finally waking up after its long slide lower, cheered on at the 705 top by the analyst community but scorned by those same folks at the recent 435 bottom. It helped the Nasdaq to end with a 29 point gain, which was also a function of other large components doing better as well, and this group included GOOG at a new all-time high, LNKD also at its best-ever level after earnings, MCHP with good earnings-related gains as well, along with ISRG with a strong advance.
And there were some positive historical statistics that came about as a result of these gains, as for instance the S&P reached its highest level since October 2007 and it was the first time since 1971 that it rose for six straight week to start a year, and it was the first time that the index has risen for this many weeks in a row since last August. The Nasdaq reached its highest level in 12 years, so the steady gains that we have witnessed in 2013 so far do not yet show any signs of abating.
And what was responsible for causing these additional gains on Friday? The first positive input was that the December trade deficit narrowed to its lowest level in three years, down to $38.5 billion dollars, which will now be enough to get the next reading on fourth-quarter G.D.P. back into the nominally positive column, probably around a gain of 0.3% after having slipped into the nominally negative reading at 0.1%, breaking the streak of 12 consecutive quarters of possible growth.
Then there was some good news from overseas in that E.U. leaders agreed to a seven-year budget that actually reduced spending for the first time in a very long time. And let’s throw in the fact that Chinese exports were better than expected as well, so you have a nice little positive combination of factors, and if we want to add in other friendly factors, there was the German 2012 trade surplus reaching its second highest level in the past 60 years.
And sure enough, after that contrived very late additional upside close on Friday as mentioned above, things are taking a little downside breather today, as the Dow has been in negative territory all session, reaching its worst level of the day with a 52 point decline at 10:15am, from which level it has managed to show some improvement and is currently lower by 26 points as this is being written. Breadth numbers are at a negative 12/17 ratio and the VIX is nominally higher at 13.14, and at Friday’s high it dipped down to a 12 plus reading, which perhaps starts to get too low for the market to make any sort of significant further advances.
Since there were no earnings or economic reports today, the various market experts had to fish around for “explanations” and the best ones that have been put forward are the following – E.U. finance ministers are scheduled to meet later today to discuss aid to Greece, hello again, there is some caution ahead of the President’s State of the Union message tomorrow night and a report that Senate Democrats are getting close to proposing a $120 billion plan for a 10-month delay to the sequester, which are the spending cuts that are scheduled to begin on March 1st. This proposal would ostensibly cover half of the cost of delaying these across the board cuts through revenue increases and the other half would be taken care of by spending reductions.
Outside markets are mixed, with the Euro moving back up a bit after a top official in that part of the world said that talk of its being overvalued was just a “diversion” from the various governments there sorting out the problems of their economies. This little rise is not helping the price of gold, which is falling back to a potential support level at $1,650. Otherwise, the bond market is quiet but good old crude oil could not stand being initially lower under $95 a barrel and has now risen close to the higher and more dangerous levels of $96.80, and its gains never seem to get contained to where they should be, as energy traders use any kind of excuse to get the price higher, as today the fact that the Euro is making a slight recovery is supposedly the “explanation.”
Of the 350 S&P companies that have been reported so far for the fourth-quarter, 72% of them have beaten the earnings consensus and 66% have beaten on the revenue side as well. Earnings are now projected to be ahead by 5.2%, 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 has 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.
This week’s earnings lineup includes: Tuesday – Dow component KO plus MHP; Wednesday – Dow component CSCO plus WFMI, NTAP and AMAT; Thursday – CBS, GM and PEP; Friday – KFT.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 5.2% 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 in 2012 except for the fourth-quarter, whose first estimate came in at -0.1%, 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