After seven consecutive weeks of gains to a 7.3% advance so far this year for the S&P and a VIX that is getting perilously close to a strong support level at 12.30, the market decided yesterday that the path of least resistance was higher once again. In fact, all of the major indexes went higher right off of the opening bell and remained in positive territory all day, as for instance the Dow jumped to a 63 point advance by 10am, never got below a 40 point gain after that and closed right in the middle of that range for a 54 final improvement.
The Nasdaq did very well on a relative basis to the Dow with a 21 point gain and the strength in this relationship allowed the major averages to go the distance, with GOOG at another new astounding high and AMZN, ISRG and the recently unstoppable NFLX all marching upward and onward. Even stocks that are well past their prime such as CSCO and ORCL also joined in the upside party as the former had the nerve to make a new 52-week high. And this Nasdaq strength came without any help from the stock named after a fruit which declined for the fifth straight day and once again followed the same pattern that it has exhibited on every one of these lower days, namely to produce early advances which ultimately dissipate by the close as traders use any opportunity of higher prices to sell into these momentary instances of strength despite the fact that three analysts had the nerve yesterday to come out with “overweight” ratings on it and the 767 (formerly 900) person was right there with his number, which would mean a 70% advance from current levels and there is a nice bridge in Brooklyn that one can buy at the same time.
Energy and financial stocks did well once again, and these two groups have been real leaders in the general uptrend this year. But there were areas of weakness as well, as Dow component WMT declined for the second straight day ahead of its earnings report tomorrow in a continued negative reaction to the fact that February same store sales have been a “disaster” in the words of company executives. Health insurers also sold off on the lowering of Medicare payments starting next year. Casino stocks declined on reports of lower revenues in Macau as well as mining and copper stocks, and copper itself declined as well ostensibly on the slightly lower February NAHB Housing Market Index.
The VIX declined right down to that critical support level of 12.30 with a .15 loss to 12.31, and if one had to raise their hands and finally say that the major averages were due for some sort of downside rest today as opposed to continued advances, I would certainly have voted for the former, don’t you think? By the way, this was its lowest level since April 2007 and once again, as I have mentioned in the past, it has been the recent peculiar machinations of the index relative to the market itself that has allowed for the virtually uninterrupted gains we have seen this year. For instance, on January 22, it closed at 12.43, not too much higher than yesterday’s 12.31 level but on that day the S&P was 1493 versus its 1530 close yesterday. What this means is that while the VIX just about stayed the same over this time period net net, the major averages were able to continue to move higher, and this was a function of the fact that on down days, the VIX rose by much more than it should have, and as we pointed out at those times, this pricing inefficiency allowed stocks to continue their advance.
The ability of the market to continue its advances yesterday was a function of Europe doing well as the various stock index futures were higher in the Monday 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.
And as Jay Leno is fond of saying – “Well you can knock me over with a feather”, as surprise, surprise, with the VIX reaching that 12.30 support level yesterday, is it any wonder that the major averages are letting out a bit of steam as they decline nominally ahead of the 2pm release of the January F.O.M.C. minutes. If one wants to look at a fundamental factor, it might be that January housing starts declined by more than expected, with a loss of 8.5%. On the other hand, building permits for new construction rose to their highest level since July 2008.
After a rise to a gain of 23 points at 10:30am on the knee-jerk sort of reaction that things are destined to only go higher, the Dow fell back to its worst level of the session so far with a 43 point decline at 11:45am and is currently lower by 21 as this is being written. The Nasdaq and the S&P basically stayed negative the entire session, the latter on the VIX holding at that crucial 12.30 support level. The Dow is doing better than the other averages, as for instance BA, IBM and WMT are doing well, the latter recovering a bit after getting whacked around to the downside recently as mentioned above. The Nasdaq is lower by the same amount that the Dow is, which is a terrible ratio, and once again the stock named after a fruit is down for the sixth day in a row and it did not even give its loyalists a higher print as it had in the previous five sessions, as it has been sharply lower all day, and the scary thing with this one is that it has declined by 17% this year while the S&P, of which it is still the largest component, has risen by 7%. This begs the question – what happens to this stock if the overall market undergoes a severe correction, which one would think is bound to happen one of these days? And those stocks in the Nasdaq that have been unstoppable lately are finally exhaling a bit, and this group includes GOOG, PCLN, ISRG and NFLX, which unlike the stock named after a fruit, have been in almost unbreakable uptrends, similar to what the latter was in a year ago at this time.
And much is being made today of the sharp break in commodity prices, particularly gold and crude oil. And hello, why is the purchase of gold at these higher levels an automatic ticket to riches after twelve straight years of price increases? And the analysis here is similar to the stock named after a fruit, as if one looks at price targets from the “experts” at large financial institutions, I do not know whether the 3”s or the 2’s take precedence, as in $3,000 and $2,000. And I love the “explanation” as to why crude oil is declining by more than $2 a barrel, as if this is another item that can do nothing except go higher. The reason being put forth by the financial media and all of the television touts is that a certain commodity fund is liquidating its position. In other words, the price of a vital worldwide commodity goes up or down because some fund manager decided to unload his or her position? I would imagine that this solidifies my belief that this is the most manipulated market of all, as pension funds, university endowments and hedge funds all invest in energy markets not because they have any idea of what the real supply/demand factors are, but rather because this is a number that is going higher, so why not jump on board, and the heck with the negative implications for consumers who buy gasoline and heat their homes, because guess what – we (meaning those who invest in this) are making money, hah, hah, hah.
And the most bizarre thing about the lower prices for gold and energy being used as a supposed “explanation” for lower stocks is that instead of like in the old days when lower commodity prices were bullish for stocks because they lessen the threat of inflation, in today’ s world, the thinking is that lower commodity prices are bearish for stocks because after all, this shows that worldwide economic growth is slowing because the lower prices reflect lower usage instead of prices coming back closer to what the supply/demand fundamentals are in the real world. This includes the fact that U.S. supplies are the highest in 20 years and that the I.E.A. has drastically lowered its projections for worldwide oil consumption, but never mind as prices shot up to the $98 a barrel level for crude oil nevertheless because the stock market was going higher.
And let it be remembered that the next event that the market will face is the 2pm release of those Fed minutes, and is the usual pattern takes place, things might drift a bit lower after their release.
With earnings season now in the home stretch, of the 405 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 5.7%, 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: later today – 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 – 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