Is there anyone out there who thought that the double-whammy that the market faced yesterday was going to allow it to build on the gains it had already achieved so far in 2013, with the S&P having advanced by 7.3% in less than two months to start the year? If you did think that things could go higher with the two situations that stocks faced yesterday, hang your head in shame, as you are obviously not following the insights that these daily notes provide.
And the first of these whammies was the fact that the VIX on Tuesday’s close had fallen to a very strong support level going all the way back to April 2007, with its 12.31 print. It was pointed out previously that even this level had allowed the major averages to advance perhaps more than they should have, as it had been the recent peculiar machinations of the index relative to the market itself that 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 Tuesday’s 12.31 level but on that day the S&P was 1493 versus its 1530 close on Tuesday. What this means is that while the VIX just about stayed the same over this time period 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.
So here you had the market well above the levels that it probably should have been and we all know the reasons that have been put forth for what had been the very solid advance in the market this year. And then on top of the very low level of the VIX, we had in addition the other almost universal negativity that results from the release of the F.O.M.C. minutes and as Casey Stengel used to say – “You can look it up”. And sure enough, the script that followed yesterday played out as it should have, as the Dow started the session a little lower, then made one last gasp higher to a 22 point gain at 10:20am while both the S&P and Nasdaq never got out of negative territory, and as we all know, when one sees this sort of discrepancy, it is almost always a function of one or two Dow stocks going higher in their own temporary upside worlds.
But then things started to fall of their own upside weight, and at the 2pm time of the release of the Fed minutes, the Dow was 20 points lower. After the minutes were released, it made sort of a dead-cat bounce up to a loss of only 10 points and at 2:30pm until the close, it was nothing but selling as the Dow put in its worst performance since February 4 with a closing decline of 108 while the S&P underwent its worst showing since mid-November. The Nasdaq, which was awful all day in its relationship to the Dow, really took it on the chin and ended with a large loss of 49 for its worst showing since early November. The downside skids came about as the result of another awful showing from the stock named after a fruit, which declined for the sixth day in a row and the issue with this one is that even as the S&P, of which it is still the largest member, rose steadily during the early part of this year to reach that 7.3% gain on Tuesday, this one had declined at the same time by 16%, and if the market undergoes some sort of overdue correction here, how is it supposed to rally, and it is selling off again on the second overall lower day in a row. At least on the up-days, it goes positive for a bit before eventually giving way to a negative close, but on lower days, it really has not chance, and this is sort of pathetic considering the fact that it trades at a very low price/earnings ratio, and sure enough, the 767 price target analyst was there on Tuesday with his call, and today we had the 888 man insisting that this is where the stock is going, and it has now fallen for the seventh straight day, so what is going to make it go up except the fact that one day it will reach a downside misery level where the sellers get exhausted and it rallies back a bit. And even those large Nasdaq stocks that had done well this year finally gave it up as well, as GOOG, PCLN, ISRG, NFLX and ORCL all sold off sharply, and of course one can ask the question – what were they doing at price levels that they had recently attained?
So what did the Fed say that caused everyone to get so bent out of shape? And the answer is that their statement in and of itself seems very bland and basically a big nothing – “The committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved.” This sort of bland statement has resulted in a never-ending round of blah, blah from all of the television touts as to its meaning, which is basically that various Fed officials have differing viewpoints as to whether or not they should continue asset purchases at the current rate of $85 billion a month, and one person’s guess is as good as the other’s. And if the reason for the large selloff is that some people believe that a part or all of this stimulus will be withdrawn, then this means that the only reason that stocks have been able to do as well as they have is because they are being force-fed all of this stimulus, and is that a reason to justify the sort of advances we have seen this year?
Then we had a huge price decline in the price of crude oil and other energy products, in addition to large declines in the price of gold and other metals. And don’t get me started here, as what were any of these items doing at these price levels in the first place? As to the former, how many times have I said that crude oil in the $100 area is anathema for stocks, and haven’t people learned from all the other times that it gets this high that equities are going to decline? So my question is – why do market experts constantly tell us that rising crude oil prices are a good thing because they show that worldwide economic growth is with us. And of all the supposed “explanations” for the large decline in energy prices yesterday, this one was the best – a certain commodity fund was being forced to liquidate its position. In other words, the price of a vital worldwide commodity goes up or down because some fund manager had 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 another 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 forget about the fact that gasoline prices at the pump are at record high levels for this time of the year with the traditional pre-summer price run up still a few months away. And people are now scratching their heads as to why energy prices are finally going back closer to where they should be?
Gold reached its lowest level since last July on the back of the weaker Euro which declined to a three-week low at 1.329, also getting closer to where it should be as well. And this is another item that is supposed to only go higher as 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.
Now to the VIX. It really did an upside number on its detractors, once again showing that the 12.30 support level that I have been pointing out as very sold is probably not going to give way this year, which means that the upside of the stock market will be limited to when it declines back to that level again. But the bizarre rise of the VIX is ultimately going to help stocks, as it gained by twice as much as it should have relative to that 108 point Dow decline, with a huge rise of 2.37 up to 14.68, which was apparently its largest one-day percentage increase since November 2011. And as I have been pointing out, this VIX rise of much more than it should be going up on down days in the market this year has ultimately allowed for further gains in stocks, as for instance the last time the VIX was at this level was on February 4 when the S&P was 1495 versus the 1512 that it closed at yesterday. This means that if it were to decline back to 12.30 once again, the market will overtake Tuesday’s highs because it is starting out from higher levels to begin with in the first place.
After yesterday’s downside shellacking, the market is sinking once again, as the Dow opened lower and kept declining and reached its worst level of the day so far with an 85 point decline at 12:45pm, from which level it has found some support and is currently lower by 70 as this is being written. The Nasdaq is doing worse with a 37 point decline, which is courtesy of the usual suspect whose name I will not mention again in addition to most of the other large members with the exception of GOOG, which is trying to hold onto a gain. Breadth numbers, which were absolutely awful yesterday at a negative 1 to 3 ratio are not quite as bad today, at a negative 8/21 and the VIX is feeling it once again with a large 1.08 rise up to 15.76 and if one wants to play the comparison game again, the last time it was here was on December 18 when the S&P was 1446 versus 1502 at the present time.
European markets were very weak on a report that the E.U. Purchasing Mangers’ Index for the first-quarter declined instead of rising as the experts had predicted. This led to another sharp decline in the Euro, down to below 1.32 for the first time in six weeks, which is putting additional pressure on most commodities once again, particularly crude oil which is also at a six-week low, below $93, and why do people get so upset when this happens as consumers are the ones who benefit from lower energy prices. And just to prove my point about how this market is manipulated higher by pension and hedge funds, in addition to university endowments, it was reported that these institutions doubled their position in crude oil in the past two months to an equivalent of 440 million barrels, and should their holdings determine what you and I have to pay to fill our cars and heat our homes, and should anyone feel sorry for them now that prices are declining to more realistic levels?
Other economic reports were kind of benign except for the February Philadelphia Fed Manufacturing Index which declined to its lowest level since last June, adding another reason for investors to sell, and when the market gets into this sort of negative mode, then the same reports that might have been ignored when stocks were rising, are now used as “explanations” as to why they are declining.
With earnings season now in the home stretch, of the 427 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 5.9%, 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.
Economic data for the week is done, and that could help as the market has been looking for excuses to go lower during the past two days.
Earnings are also basically finished for the week as well.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 5.9% 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