The market ended last week on a mixed to lower note, which is not unusual for a monthly Friday options expiration series, as for the past five days the S&P advanced by 0.1% while the Dow and Nasdaq declined by those same amounts. On the other hand, the Russell 2000, the mid-cap and the Dow Jones Transports all made new highs, continuing their trend in the upward direction. Let it also be noted that the S&P has advanced for seven straight weeks in a row at the same time that is has declined on every Monday this year, including last Monday as well. It is now higher by 6.6% for the year.
The Dow began the session with a 28 point advance at the morning high on some better economic reports that included the NYState Empire Manufacturing Survey which rose for the first time in seven months and a three-month high in the preliminary February U. of Michigan Consumer Sentiment Survey. From those best levels, things took a dip, most obviously related to the attempt by market makers to cause as many calls as possible to expire worthless and two outstanding examples of that were the close of BAC right near the 12 level, which is where the huge number of calls and puts went out with very nominal value for the former and no value for the latter. CSCO was another one that was maneuvered to 20.99, which meant that the large number of calls and puts at the 21 level also had no value as well, and so it goes. We had already mentioned in Friday’s notes that the largest option stock of all, namely the SPY, also saw a destruction of put buyers to the tune of 3.7 million and 663,000 calls as well.
In fact, the Dow turned that 28 point high into a loss of 67 at the 2:30pm low, which meant that it underwent an intraday downside reversal of 95 points before it could not bear to be lower and chopped back upward in the last 90 minutes of the session to finally close with an 8 point gain.
The ostensible reason for the decline was a report that WMT, the largest retailer in the world and a Dow component, had said that February sales were “a total disaster” in their own words due to the effect of lower take-home pay due to the higher social security payroll deductions, higher health care costs and record high gasoline prices for this time of the year. On the other hand, late rallies in components IBM and UTX allowed the Dow to close positively as mentioned above despite investors getting bent out of shape over WMT, which will report its earnings on Thursday and will also make a projection for the upcoming quarter as well.
What we had was a little reversal of the pattern from last Wednesday and Thursday where the S&P and Nasdaq ended higher while the Dow ended lower on both of those days, so it was sort of an equalization process in the context of the general uptrend that stocks have been in this year. The VIX reached that 12.30 support level three times during the course of the day when the major averages were all on the plus side and this sort of acted as a resistance level for further advances. It then rose by .23 when the Dow was on its worst afternoon level as mentioned above before a very strange late decline of .20 to end at 12.46 when the Dow made that very late comeback.
The Nasdaq was hurt a bit by what is becoming somewhat of a regular occurrence in the sense that the stock named after a fruit declined for the fourth straight day after having been higher early on all four of them despite the fact that its devoted coterie of sector analysts still rate the stock as a strong buy, although they have now lowered their price targets to perhaps a more realistic level in the 600’s although there are two holdouts on the all is great with this company attitude. The first has been humbled from 900 down to his current 767 while the other is now at 888 from 1111, and this person obviously has a penchant for repetitive numbers. I would imagine that if the next earnings report in April is a disappointment, they would then continue to lower their price targets AFTER the fact as all of them have basically done in any event.
Breadth numbers were slightly negative at a 14/15 ratio and the outside markets made some large moves in that crude oil is still having trouble getting over $98 a barrel, thank goodness and ended below $96, while the Euro also sold off down to 1.335 on a report that exports from that region underwent their largest decline in December since last July, which is not a surprise considering the still-weak state of their recession-mired economies. And how about gold, which is considered by some to be the next coming of the Holy Grail based on its 12 consecutive positive years, but perhaps enough is getting to be enough with this already as it declined to its lowest level since last August on better economic prospects and the possibility of the Fed ending its accommodation programs sooner rather than later.
Is the S&P going for eight weeks in a row on the upside? Well, it certainly seems as if it is certainly trying, as the various stock index futures were higher in the overnight session based on the fact that European markets were strong on the highest level in three years for German consumer confidence. Then we got another upside motivation here with the announcement of a possible merger involving two office supply companies, both of which have seen their stock prices plummet in recent years although both have improved sharply from extremely low levels recently, and they are ODP and OMX. This would add to the $158 billion already announced merger and acquisition deals this year, compared to the $100 billion total during the first two months of 2012.
The Dow jumped to its best level right out of the opening gate and reached a 63 point advance at 10am and is currently ahead by 46 as this is being written. It is getting help from the VIX, perhaps to compensate for its larger decline than normal on Friday as it has stayed positive all session even though all of the major averages are solidly ahead. In fact, it is currently on its low of the day with a gain of .08 to 12.54, still not being able to break below the 12.30 support level which in its own twisted way has allowed the overall market to keep pushing higher this year.
Breadth numbers are at an 18/10 upside ratio and the outside markets are a little quiet, with crude oil nominally lower as is gold, while the bond market is doing nothing. The Euro is improving somewhat perhaps on the better German consumer confidence number.
Health insurance stocks are selling off on proposed lower 2014 Medicare payouts, while casino and mining stocks are also bucking the general uptrend as well. And WMT, which got blasted on Friday on that poor sales projection, is nominally lower ahead of its earnings report on Thursday.
With the March 1 deadline for trying to agree on a deal to avoid scheduled budget cuts, otherwise known in plain (?) English as sequestration, Senate Democrats unveiled a $110 billion plan to in fact delay those cuts, including tax increases that Republicans say that they will not accept. The plan would delay the March 1 start of more than $1 trillion in cuts until 2014, and would substitute defense spending reductions, a stop to direct farm subsidies and a tax increase on the top wage earners.
With earnings season now in the home stretch, of the 391 S&P companies that have 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 5.6%, better than the 1.9% projection at the start of the reporting period. 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.
There will be a lot of economic data this week with: Wednesday – January housing starts and building permits, January P.P.I. and most importantly the release of the minutes of the January F.O.M.C. meeting; Thursday – January C.P.I., weekly jobless claims, February Philadelphia Fed Manufacturing Index, January existing home sales and January L.E.I. Earnings are in the home stretch and retailers always bring up the rear, so to speak, and this week will see – Wednesday – FLR, DVN; Thursday – Dow components WMT and HPQ, plus PEG, CMS, INTU, HRM, JWN and CHK.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 5.6% 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 14.9 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