Not even a rise in Venezuelan bond yields yesterday due to the passing of President Chavez could stop a market that appears destined to want to go higher and higher at the present time, as market bulls are using every piece of positive news that comes out to justify more elevated prices for the major indexes and the peculiar action of the VIX (as I have been explaining for weeks now), is also allowing for higher equity prices as well.
And sure enough, the Dow jumped out early to a new all-time high intraday level of 14,320, which represented a 67 point gain, then declined from those best-ever levels to be ahead by “only” 12 points at its 12:15pm low before coming back once again to finally close with a 42 point advance. Breadth numbers were positive at a 16/13 upside ratio but the Nasdaq could not get its act together and ended with a closing loss of 2 points. As I have pointed out, traditionally when the Nasdaq lags the Dow on the upside, it tends to pull the other averages lower as well by the end of the day, but because of the collapse in the price of the stock named after a fruit, which is still the highest market cap stock in the world, the Nasdaq decline has been peculiar and out of whack in its traditional relationship to the Dow, and because of the price collapse of this one particular stock only, the relationship of the two indexes has not prevented the Dow from moving higher on its own accord.
And it was not only the stock referenced in the prior paragraph that held the Nasdaq back, as mighty GOOG, which has been in its own upside world, gapped open to draw in new buyers at higher levels before this one sold off sharply from those early higher and ended lower. On the other hand, would you believe that CSCO and ORCL, two of the relics of the 1990’s technology boom, kept pushing higher and they have done very well this past year.
And now to the VIX, which in its own bizarre pattern lately has allowed the major averages to keep pushing higher in 2013, and yesterday’s action in this index once again helped, as despite the fact that both the Dow and S&P ended higher, the VIX actually had the nerve to end higher as well, and this is best possible combination of all, as when the VIX advances at the same time that the market does well, it pushes it further away from its near-term downside support level at 12.30, which I do not believe will be breached this year but in the meantime the market can still move higher up to that point, and today’s action of the VIX is also helping the upside as well as will be explained later.
And as the market perceives an improving economy, yields on the 10-year Treasury note continue to inched higher, still within the recent range, as they got up to 1.94% after the release of the friendly ADP estimates for tomorrow’s jobs report. And how about crude oil, which got sold down to under $90 intraday but buyers could not resist the temptation to enter the market with an 8 in front of it despite inventory levels rising by much more than projected, but never mind, players in this market can always go back to the old “economic optimism” argument as represented by higher stock prices generated as a result of these better reports. And even the beaten-down Euro appears to be trying to find support at an even number as well, as buyers of the common currency seem to appear under the 1.3000 level.
Financial stocks did very well once again, and this group has certainly taken a leadership position this year, as yields on Spanish bonds declined for the sixth straight day, their longest such stretch since August and even bonds in Italy rose as well despite that election-fiasco panic from early last week.
So what latest pieces of good news got things going to the upside once again? And sure enough, investors believed in the ADP estimate for tomorrow’s jobs report, even though this outfit has been wrong more often than it has been correct, but when the market wants to go higher it will jump on any piece of “good” news to justify its gains, just as when it wants to go lower it will think of anything to put a negative interpretation on as well. They estimated job growth of 198,000 versus the official estimate of 170,000 private jobs and the real shocker was their upwardly revised number of 215,000 private payroll jobs in January versus the still official figure of 166,000 so it will be interesting to say the least what the numbers show on Friday morning, especially that upward January revision.
The market also interpreted the Fed Beige book, released at 2pm, as friendly as well, as it said that the economy grew at a moderate price amid rising consumer demand for homes and automobiles in their latest survey period. Even the January factory orders report had a positive spin put on despite the fact that it declined by 2%, because these declines were primarily the result of lower military and aircraft orders.
Then there becomes the question of whether or not the market is overvalued at its new highs for the Dow and close to new highs in the S&P. At the October 2007 top, the price/earnings multiple for the Dow was 17 and for the S&P it was 17.5. Today it is 15.9 for the Dow and 13.9 for the S&P assuming that earnings for the latter are going to be $111 this year. The bullish argument is that the market is still undervalued at this level and the bearish one is that investors do not have faith in earnings expansion, which is why the multiples are lower this time. One also has to take into account the record low levels of interest rates at the present time in calculating why the p/e multiples are lower now as well, because stocks do compete with bonds for investor participation.
Ho, hum, another day, another dollar as the old-time civil servants used to say, as the Dow reached an all-time best intraday high for the third day in a row, at 14,355, a gain of 59 points at its best 11:10 level, from where it has eased off a bit and is currently ahead by 43 as this is being written. Breadth numbers are at a 17/12 positive ratio and the VIX, after once again starting out with a smaller decline than it should be showing relative to the Dow advance, has finally caught up and is lower by .43 to 13.10. Even at this level, it is allowing for further market advances, as the last time it was here was on February 8th when the S&P was 1518 as opposed to its current level of 1545 today, but as it gets closer to 12.30 the question then becomes – how much higher are things supposed to go, and for sure tomorrow’s jobs report will be the key in determining the market’s near-term future course.
And surprise, surprise, bond yields are once again moving higher, with the 10-year Treasury note up to 1.98% as jobless claims declined to a six-week low today and the four-week moving average fell to its lowest level since March, 2008, which of course is being cited as the primary reason for the stock market’s continued advance today. On the other hand, the January trade deficit widened out to $44.4 billion from December’s three-year low at $38.1 billion, which was one of the reasons why the latest estimate of fourth-quarter G.D.P. was revised upward to 0.1% from its first reading at -0.1%.
And sure enough, crude oil is finally getting into the upside act as well, despite the fact that inventories in yesterday’s weekly supply report were much higher than expected, but never mind, if equities are rising, this must mean that optimism about the economy is improving as well. And how about the recently beaten-down Euro rising by the most in eight weeks against the dollar as E.C.B. President Draghi had the nerve to say that the economies of the E.U. will gradually improve later this year and at the same time gave no hint that he was going to raise rates there. In fact, the E.U. is now projected to show a decline of 0.4% in its G.D.P. for this year, worse than the prior projection for a decline of 0.3%. But never mind, the fact that bond yields in Spain continue to decline is also being cited as a positive factor for the common currency, which rose by a full cent up to 1.3100. At the same time, the Japanese yen declined to its lowest level against the dollar since August, 2009 at 94.9, which is what the government there wants, in order to stimulate their exports.
To no one’s surprise, the financials are once again leading the way, as is IBM, which has risen steadily lately and has been a large contributor to the ongoing gains that the Dow has shown this past week.
Then we come to tomorrow’s jobs report, which still has consensus estimates from the experts lower than the ADP projections that were released yesterday (see above), so something has got to give here. I have always maintained that the worst thing you want to see is a rising market ahead of a major event, and if yesterday’s and today’s gains are primarily due to those higher ADP numbers, which are 198,000 for February and 215,00 for January. If the official numbers come in below the ADP levels, a very extended market could be in for some sort of correction.
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 13.9 times the projected 2013 earnings of $111. Earnings were $85 in 2010, $92 in 2011 and $102 in 2012. The estimate for 2013 is $111, a gain of 9%. 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 have had 14 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. G.D.P. rose 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. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}.