Ostensibly spooked for the second day in a row by what the Fed had to stay in the Wednesday release of the F.O.M.C. minutes, the Dow opened lower in a carryover selling spree from Wednesday’s triple-digit decline. After the initial 30 point loss, things deteriorated as the session wore on until a low of 93 points was reached at 2:20pm, from which level the selling finally exhausted itself and the Dow was able to cut that loss in half to finally end 47 points lower.
The Nasdaq did even worse as it closed with a 33 point loss, highlighted by the stock named after a fruit which declined for the seventh straight day despite the 888 price target analyst coming out and re-iterating his call. In addition to this one, the Nasdaq was hurt by weak performances from some of the old-time has-beens such as ORCL, CSCO and MSFT, and to their credit they have done much better lately.
Financial stocks, which have done so well this year, also sold off and one can see the hand of today’s weekly options expiration at work in some of them where there had been a huge buildup in call open interest, as for instance take a look at the 11.50, 12 and 12.50’s for BAC, after the stock had gone well over 12 in the early week exuberance. On the other hand, the shares of WMT did well on a poor day after getting sold off earlier in the week on that report of “miserable” same store sales in early February. The Dow was also helped in its late comeback from the lows by a late gain in HPQ by those who were so smart that they had the insight to know that the earnings report would be favorable, which it was.
Breadth numbers were poor for the second day in a row at a negative 9/21 ratio and our good old friend the VIX rose by .54 up to 15.22, but when the major averages were on their lows, it had gotten as high as 16.21 for a gain of 1.53, much more than it should have relative to the Dow’s decline. And I have said that this ultimately is going to help the market because it is another example of outsize VIX gains on down days which ultimately puts it further away from its ultimate 12.30 downside support level and which then gives the market more theoretical room to advance because the major averages are starting out at higher levels than they were the last time that the VIX was as high as it got this week, and the specifics of this relationship were pointed out yesterday and Wednesday so they will not be repeated here.
And once again, the outside markets got interesting because of the F.O.M.C. statement that now said that they were going to consider varying the amount of their current $85 billion in monthly asset purchases, and to me this is much ado about nothing because there has not been a decision made in this regard but certain markets interpreted it as being very negative. An example of this negativity continued in the Euro, which declined to below 1.32, its lowest level in six weeks, helped as well by a European Purchasing Managers’ Index that declined in the first quarter instead of rising as the experts had predicted, which illustrates the weakness that still exists in that part of the world. Then we saw the yield on the 10-year Treasury note decline down to 1.97%, still within its recent range but lower than it had been while stocks were pushing to their recent highs. And of course we also saw crude oil get blasted to the downside as well, below $93 a barrel, its lowest level this year as supplies rose by more than expected, and are we still paying more at the pump than we were at the start of the year despite this decline? Actually, these are now the highest supplies since last July.
It is interesting that when the market wants to decline, it ignores news that on an up-day is offered as a bullish reason, as we saw with the HNZ takeover. So yesterday’s announcement that LINN and BRY are joining together did nothing for the overall market, which now means that the S&P underwent its worst two-day setback since November, which still leaves it ahead by over 5% so far in 2013.
After the two negative days, things are doing better today, as I mentioned that the higher level of the VIX would allow the market to resume some gains, and once again as long as the VIX is above 12.30 this would theoretically gives stocks some more room to advance. And naturally some sort of “explanation” in the fundamental sense had to be given and today one of the stories put forth was that German business confidence rose to a 10-month high, which caused European markets to do better, and then earnings reports from Dow component HPQ in addition to AIG is helping as well, in addition to a gain from TXN on a dividend increase.
The Dow started out higher by around 30 points and lingered at that level for the first two hours before undergoing a recent upside acceleration to its best level of the day at a 110 point advance. Breadth numbers are at a 21/8 upside ratio and the VIX is lower by .85 down to 14.27, a little less than it should be and once again this will continue to give the market theoretical room to advance on the upside.
Despite better earnings cited as a reason for the market advance, one area of weakness is the retailers, hurt by poor profit reports from JWN and ANF, so all is not rosy with this group as consumers are being burdened by record high gasoline prices for this time of the year in addition to lower take-home pay because of the rise in the Social Security tax rates.
Outside markets are on the quiet side after probably having suffered from exhaustion from their large moves, primarily to the downside earlier in the week as crude oil, gold, the Euro and even the bond market is not doing that much.
With earnings season now in the home stretch, of the 439 S&P companies that have reported so far for the fourth-quarter, 71% 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 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.
Economic data for next week is going to be heavy, but the February jobs report will not be until Friday, March 8th. The lineup is as follows – Tuesday: December Case Shiller Home Price Index, February Richmond Fed Manufacturing Index, February Consumer Confidence, January new home sales; Wednesday – January durable goods orders, January pending home sales; Thursday – next estimate of 4th quarter G.D.P., weekly jobless claims, February Milwaukee NAPM Index, Kansas City February Manufacturing activity Index, Chicago Purchasing Managers’ Survey; Friday – January personal income and spending, February final U. of Michigan Consumer Sentiment Survey, January construction spending, February vehicle sales, February ISM Non-Manufacturing Survey.
Earnings are basically coming to an end for the fourth-quarter and next week will be dominated by retailers as the season finishes up.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 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