Yesterday’s Dow and S&P advance to new highs for the current move illustrate how the out of line gains for the VIX on days when the market has declined lately ultimately allow things to push higher. As an example of this, the S&P closed yesterday at 1519 and the VIX closed at 12.64. The last time the VIX was in this neighborhood was on January 24 when it ended at 12.69. But on that day the S&P was “only” 1495, which means that basically the VIX stayed the same during this period but the S&P made that additional 24 point move higher, and this was the result of the VIX rising too much relative to declines on certain days which then moves it further away from its near-term support level at 12.30, which then gives the market the room to keep rising as we saw yesterday.
The Dow began the session with a hesitant start and then started a steady chop higher which resulted in a gain of as much as 68 points at its best 1:40pm levels. But once again, as we have seen so many times this year the Nasdaq lagged and was only higher by 4 points when the Dow hit its high and this negative relationship acted as a drag on both indexes, as the Dow moved down from those highs to end with a 47 point gain while the Nasdaq slipped into the minus column with a closing 5 point decline.
The Dow was helped by very strong gains in its financial components as they reached new 52-week highs in most cases and was able to overcome a selloff in the shares of KO after its report, but the Nasdaq was hampered by (oh, no – this is getting to be an old story lately) a horrible performance by the stock named after a fruit, and believe it or not, this was the result of the old CSCO syndrome, namely where what the C.E.O. says about his company brings it lower, and yesterday was a classic as the C.E.O. of this particular company said that that “Cash isn’t burning a hole in our pocket”, which basically means that they are not going to increase their dividend which is still low by the standards of other technology stocks that have also seen better days. He also dissed as a “silly sideshow” the suit by a large hedge fund and owner of shares to block a proposal to eliminate the board’s ability to issue preferred stock without seeking shareholder approval. He then said that the board will “seriously consider it.” This knocked the stock back from what had been an early gain of 2 points into a closing decline of 12, thanks a lot. And this rapid selloff is another example of the loss of upside momentum that the stock has recently developed after a 38% decline from the high last September. Also hurting the Nasdaq by the close was a selloff from new all-time highs in GOOG, which has certainly been a stock going in the opposite direction to the one named after a fruit.
Breadth numbers were very good at a 19/10 upside ratio and the VIX did close near its lowest levels of the session with a late loss of .30 down to 12.64, which puts it close to the 12.30 downside support level and which could hinder further upside progress until it perhaps rises back up once again, as it has done on the down days in the market lately, which once again permits things to ultimately move even higher, as we saw early today. In the meantime, yesterday’s Dow close at 14, 019 is getting close to its all-time high of 14,165 reached in October 2007, and how many investors are there who feel that their portfolio is back up to where it was at that time, and I doubt that there are that many.
The main features of the outside markets were that crude oil continued what appears to be its unrelenting move higher, closing at $97.50, another gain of .50 or so and now we have O.P.E.C. trying to manipulate the price even higher by saying that worldwide demand is going to increase and this comes despite the fact that crude oil output in the U.S. rose to its highest level in 20 years, up to 7 million barrels a day and even the International Energy Agency reduced its 2013 world demand estimate by 90,000 barrels a day, but never mind. O.P.E.C., on the other hand said that global oil use will increase by 840,000 barrels a day to 90.7 million so guess which party here is talking their position, so to speak.
The Euro also continued its recent rebound after declining to a two-week low, and it is now up to 1.345, sort of in the middle of its recent range.
Yesterday was the last trading day for the February VIX options and they expired on today’s opening price, which was sort of unchanged from yesterday, under 13. This means that 2.5 million call buyers got hung out to dry by purchasing merchandise from 13 all the way up to 80, would you believe it, on the advice of these television touts and others who tell you that an “excellent” way to hedge your portfolio is through the purchase of VIX calls in case of a sharp market selloff that would ostensibly get the VIX to the higher levels, which of course has not happened for the longest time.
Today’s market has something for everyone, as the Dow started out nominally higher but then slipped into negative territory by 10:30am from which it has not been able to recover, reaching a low of 64 negative points and is currently down by 45 as this is being written. However, the broader market is doing better as breadth numbers are at a positive 17/11 ratio. The S&P is on either side of unchanged while the Nasdaq is actually doing better as the beaten-down stock named after a fruit is actually having the nerve to show gains for most of the day so far. The Nasdaq is also being helped by good performances from other high-priced members such as AMZN, GOOG, NFLX, and ISRG in addition to CMCSA which is buying out its remaining stake in GE’s NBC Universal, which includes television station CNBC.
Economic reports were on the light side, with January retail sales barely rising in January as higher payroll deductions and gasoline prices restrained consumer spending, and it is astounding that the stock market keeps rising despite the fact that the economy got little help from consumers, whose purchases make up 70% of G.D.P. These sales rose by 0.1% after a rise of 0.7% in December.
Otherwise, market experts are sort of fishing around for explanations today, as first the President’s State of the Union address was considered bullish, but now it is not so bullish, and of course today’s market action has little or nothing to do with what he said in the first place. He did propose increased spending on infrastructure in the amount of $50 billion and environmental programs as well. However one stock is apparently reacting to what he said, and ironically it is the largest loser in the Dow, none other than MCD, which is selling off because of his proposal to raise the minimum wage from $7.50 to $9 an hour, the nerve, and I would assume the negative reaction is coming from the many lower paid employees that this company has.
He also repeated his pledge to cut spending on Medicare by reducing payments to drug companies, raising premiums for the higher income earners and changing medical re-imbursement procedures. He also let Republicans know that they have to accept raising tax revenues along with spending cuts as part of any “balanced” approach to the deficit reduction program of $1.5 trillion over the next decade by getting rid of certain tax loopholes and deductions.
The VIX is following the Dow pretty closely today, with a rise of .41 to 13.05 even though it is ultimately based on the S&P, which is on either side of unchanged, but once again, as mentioned earlier, this higher VIX could give the market further upside room as has been the pattern of 2013 so far.
Outside markets are doing what they have basically done lately, with the yield on 10-year Treasuries back up to 2.02% on the generally better economy, gold prices easing off again and crude oil back up to $98 a barrel, from which level it has eased off once again.
Of the 354 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 5.3%, 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. 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: tonight – Dow component CSCO plus WFMI, NTAP and AMAT; Thursday – CBS, GM and PEP; Friday – KFT.
Economic reports will pick up as the week moves ahead, with: Thursday – weekly jobless claims; Friday – February NYState Empire Manufacturing Survey, January industrial production and capacity utilization and February preliminary 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. 5.3% 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 14.7 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