Yesterday’s market action is going to force me to repeat what I have been saying lately about the complacent mentality that has sort of lulled investors to sleep in the sense that it has become a given that stocks are destined to march higher without interruptions despite the fact that the VIX declined to levels not seen since February 2007. At the same time, we are getting close to levels that have to indicate that things are getting overbought. So now we can modify the statistics to show that as of Monday’s close, – both the Dow and S&P have risen for seven straight days, the Dow has advanced by 10% this year, the S&P is ahead by 9% and the Nasdaq is higher by 8%. And the Dow has now made new record all-time highs for five consecutive trading sessions. And I will keep repeating what the old-time civil servants would say to a market such as this, until proven otherwise – “Another day, another dollar.”
And yesterday was typical of what we have seen this year, as the Dow opened lower by 24 points which immediately caused investors to salivate as they used this “dip” in the market to enter new positions. And sure enough, at 10am the Dow was not going to hear any of this downside nonsense as it got back to positive territory and stayed nominally higher until the latest upside acceleration at 11:30am got it into solid positive territory and it chopped around for the remainder of the afternoon before making another very late upside acceleration to close with a 50 point gain at 14,447, the highest it has ever been.
Even the Nasdaq got into the upside act for a change as after it had been lagging for most of the session as it traded around unchanged even while the Dow was ahead by 40 points or so for most of the afternoon, it also got dragged kicking and screaming to the upside as the stock named after a fruit decided to take some pain away from its long-suffering holders by having the nerve to turn what had been a 3 point loss for most of the day into a rapid upside acceleration at 2:30pm and ended 6 points higher, once again on vague rumors and “predictions” from self-interested parties that the company is finally going to announce what it plans to do with its growing pile of cash by next month at the latest, perhaps at the earnings announcement on April 23rd. The current $137 billion is expected to increase by another $42 billion this year, and the proposals have run the gamut from high-yielding preferred shares, a higher dividend payout or a stock buyback program.
Breadth numbers were okay at a 16/14 positive ratio and the 10-year Treasury yield rose to a further 11 month high at 2.06% on growing optimism about the economy as evidenced in last Friday’s jobs report. And other outside markets could not to wait to get into the upside act as well, as the Euro continues to stabilize under 1.3000 and both crude oil and gold did not want to be left out of the upside fun and both advanced a bit from the lower levels that they have attained recently.
The main feature of yesterday’s trade was the bizarre very large decline in the VIX, which actually gapped lower even when the major averages started out the day lower as mentioned above. In other words, even when the Dow and S&P were down early, the VIX started trading at 12.34, which was .24 points lower than Friday’s close. As the day moved on and the major averages improved to their best levels on the close, the VIX steadily declined and underwent a rapid downside acceleration to end with a huge loss of 1.20 to 11.56, its lowest level since February 27, 2007. In the Reuters story that I was quoted in about it, which was distributed yesterday afternoon, some other person mentioned that the large decline was the result of the fact that during the monthly S&P options expiration week, which is this week, the VIX calculation switches from using the first two months, namely what would be March and April, into the following two months, which would be April and May. I still do not know why this would distort the calculation as it did yesterday, unless it is because the option prices for the latter two months are higher in sum than the nearer ones and therefore have more room to decline. Of course, the validity of this argument must be measured against the fact that today, for instance, the VIX is rising by more than it should be, so in a sense this has been somewhat of an equalization process these past two days.
Could it be, could it actually be, that the Dow is going to have the nerve not to close at another record high today after it did probe into new uncharted high waters this morning. As has been the recent pattern, it started out nominally lower with a 15 point loss on some statement from a Bundesbank official that the E.U. crisis has not ended, before the buy on the dip people rushed back in, which resulted in a gain of as much as 31 at 10:20am to a new all-time high intraday level of 14, 478, from which level the impossible happened – it actually started to decline, the nerve. It got as low as a loss of 24 points at 11:50am from which level it has steadied once again as is currently lower by 10 points as this is being written.
And once again, the Dow is sort of in its own stronger world than the other averages due to strength in MRK, which is adding 11 points just by itself and by BA and UNH which are adding another 10 points combined. On the other hand, the S&P has been lagging the Dow all day and the Nasdaq is a loser due to the stock named after a fruit once again not being able to stand its one day of prosperity and is getting whacked around once again, and today it is being joined by others which have done much better this year, namely GOOG and PCLN, and most of the has-been ones from the 1990’s, such as CSCO, MSFT, INTC and ORCL, which has been the best acting of this bunch. Further proof that the Dow is still flying solo is that breadth numbers are poor at a negative 11/18 ratio despite that nominal decline in the Dow at the present time.
Bond yields are finally declining after rising as the market’s recent string of gains convinced fixed-income traders that the economy was doing so much better that they had to sell out of their holdings, with the 10-year dropping its yield down to 2.02%. Crude oil prices are rising from what appears to be strong support just under $90 a barrel although gasoline prices are lower once again. And gold is moving higher after finding very good support around $1,560 with most “experts” in this field turning bearish right at the lows.
And now to the VIX, which made that really strange collapse yesterday but just to show how phony the very late move down was, even when the Dow and S&P were on their best morning levels as mentioned above, the VIX was always positive, which certainly corrected that strange move with all of the esoteric “explanations” offered by a supposed VIX expert as mentioned above (not me, who said the correct thing in the article, namely that the very low level of the VIX means that things perhaps need to cool off a bit on the upside). In any event, its low today was a gain of .18 to 11.74 at the market high and now that stocks have moved to the downside, it is higher by .81 to 12.37, back above what had been its long-term support level and now that 11.56 area will become support on the downside, and in tomorrow’s daily market notes we will calculate what the VIX has done on the first two days this week relative to the Dow and S&P, and see how this might project the near-term direction of the market.
There is 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 14.1 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.
Earnings are virtually over for the fourth-quarter and there will be some specialty retailers reporting this week that will have no effect on the overall market, as COST is higher today while the major averages are lower.
Economic reports this week will include – Wednesday – February retail sales, January business inventories; Thursday – February C.P.I., weekly jobless claims; Friday – March NY State Empire Manufacturing Survey, February C.P.I., February industrial production and capacity utilization, mid-March U. of Michigan Consumer Sentiment Survey and the March NAHB housing market index. It would appear that the retail sales report will be the most important.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, were flat for the third-quarter and were 6.2% higher in the fourth-quarter. The current projection is for a gain of 3.5% in 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}.