Perhaps the best thing that happened yesterday was that the Dow did not make a new all-time high, to the great disappointment of the floor of the exchange, which had the balloons and the confetti ready to celebrate this blessed event if in fact it took place. And it certainly gave it the old college try before fading out at the end of the session after it had gotten to within 16 points of its best-ever level, at 14,149 versus the record high close of 14,165 on October 9, 2007. For those historical statisticians out there, the best ever intraday level was 14,198 a few days later on October 11, 2007.
And the reason I say it is better that the Dow did not make a new all-time high is, in my opinion – how many investor’s portfolios are doing the same now as they were the last time the Dow was at record levels five and a half years ago? For instance, is the value of a person’s home the same as it was at that time, are you getting the same rate of return that you got on your money market funds at that time (around 4% versus virtually nothing today), and did you have to live through the worst market decline since the Great Depression of the 1930’s when people’s stock holdings were decimated?
In any event, the Dow began the day with a steady pattern, then went nominally positive by 11am, at which level it remained until a 1:15pm upside acceleration which got it up by 74, to the level mentioned in the prior paragraph. It remained somewhat elevated with a 35 point advance at 3:30pm, and only in the way that only Wall Street can do, from that level the market made a very late plunge, not quite as dramatic as the 156 point collapse due to the Monday strong election showing in Italy from the comedian Beppe Grillo, but upsetting in its own right. The final result was a 21 point closing decline for the Dow, which once again justifies my long-held contention that market makers and other interested parties will maneuver the major averages to get them to close negative on the last trading day of the year. For instance, even though 2012 was a generally higher year for stocks, the averages closed lower more times on the last day of the month than they did higher and so far this year they have closed lower on the last trading day of the first two months despite the fact that they are all higher so far in 2013. This is some co-incidence, right?
And talk about a collapse, how about the shares of surgical device maker ISRG, which fell from 570 to 492 in the last five minutes of the day on a report that surgeons using this device will get a questionnaire as to its effectiveness. And what about the person who got stopped out at the low only to see the shares trading at 555 today, and what else is new?
And how about the good old VIX, which was lower by .57 points when the Dow was on its early afternoon high, then went negative at 3:10pm even though the Dow was still positive (I assume on some negative premonition) and then made one of its bizarre late upside accelerations, similar to what it did on Monday but without as much drama, finally ending with a .78 point gain to 15.51, and once again as I have said so many times in the past, this pushing of the VIX higher than it should be allows the market to make continued gains because this higher price for the VIX pushes it further away from its 12.30 support level and then allows the major averages to keep gaining on the upside until it gets closer to that level once again.
What ostensibly happened to knock the market lower that late in the session was blamed on “quarterly re-balancing”, whatever that is supposed to mean and why does this process invariably result in lower prices and it was not even the end of the traditional calendar quarter in any event? For sure, there was huge volume on the close so something of this nature was going on. Then one could point to the sequestration drama in Washington, D.C. as the White House and the Republicans played the blame game again for failing to prevent a potential crisis at the same time that the I.M.F. said that failure to resolve these issues would result in slowing U.S. and world economies. The full force of these cuts will be felt in seven months and Congress can put an end to the process if the two sides agree on how to do so. And we shall see how this plays out.
Breadth numbers were still nominally positive at a 15/14 ratio even though the major averages made that late plunge. The upside had originally been motivated by further good economic reports, as weekly jobless claims declined by 22,000 down to 344,000, the second reading of the fourth-quarter of 2012 G.D.P. went from -0.1% to 0.1% on a narrower trade deficit in almost three years which offset the largest drop in military spending since the Vietnam War, and the February Chicago Purchasing Managers’ Survey rose by more than expected.
Despite the late slide, the S&P did gain for the fourth straight month and is ahead by 6.2% so far this year.
With sequestration hanging in the air, the market started out lower today, with the Dow falling right off of the opening bell to a 117 point loss, from which level it has astoundingly climbed choppily higher, and is ahead by 37 points as this is being written. The supposed “explanation” for this is that economic reports once again came in better than forecast as the final February U. of Michigan Consumer Sentiment Survey rose by more than expected and the February ISM Manufacturing Survey rose at its fastest level since June 2011. Apparently this was enough to get the market turned around despite bad news from overseas as China’s manufacturing slowed for a second month and factory output in the E.U. contracted for the 19th straight month as their recession deepens. And let it not be forgotten that January personal income declined by 3.6%, the most in 20 years, obviously a function of the higher social security tax deductions on wage earner’s checks. And to top off the negative news, the Senate turned down two partisan proposals to replace the automatic across the board sequester cuts, but never mind, the market is taking on an optimistic view here.
The VIX once again had a brief upside field day with a 1.31 point advance up to 16.82 when the major averages made their early lows as mentioned above, and then reversed course as things started moving higher. It is currently lower by .26 to 15.26 and once again it is allowing the market to go higher as long as it exhibits this kind of bizarre pattern. For instance, in the past two days up till now, the Dow is net ahead by 16 points and yet the VIX is also net ahead by .53 (.78 – .25), and this is why things have the ability to move even higher, believe it or not.
Breadth numbers are just about even and the best thing that has happened recently is that crude oil and gasoline prices continue to decline, and it is interesting to see the “explanations” for it, and energy experts are saying that they are lower because of the poor Chinese and European numbers as mentioned above, but wait a minute, these numbers are not knocking the stock market lower, and neither are the sequestration fears, so wait a minute, this must mean that once again, energy prices got way ahead of the fundamentals on the upside and I still maintain that this is the most maneuvered market of all, as what justified the price of crude oil getting to $98 a barrel a few weeks ago and resulting in the highest ever gasoline prices at the pump for this time of the year? So the recent decline is really a case of market fundamentals finally catching up to those who got a little too exuberant in their upside objectives, and this includes all of the pension funds, hedge funds and university endowments that decide to get involved with this market because it is a number that is only going to go higher, supposedly.
With earnings season now in the home stretch, of the 470 S&P companies that have reported so far for the fourth-quarter, 72% of them have beaten the earnings consensus and 67% have beaten on the revenue side as well. Earnings are now projected to be ahead by 6.2%, 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 reports this week will be highlighted by the February jobs report one week from today.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, and were flat for the third-quarter. 6.2% 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

Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author.