Even though the Dow did achieve another new all-time high yesterday for the sixth consecutive time as it has advanced for eight straight days, I am not going to repeat the old-time civil service mantra that has become the best way to describe what has been going on in the markets lately, namely “Another day, another dollar”, because the Dow sort of flew solo to the upside by eking out a nominal gain at the close with a 2 point advance at 14,450 while the other major averages had the nerve to end nominally lower.
And it was a typical 2013 Dow performance as it began the session with a 12 point decline on the usual grabbing out of the bag some ostensibly “negative” story from overseas, and this time it was apparently a statement from a Bundesbank official to the effect that the E.U. crisis has not ended, thank you very much. Of course the Dow shrugged this off like the melting of snow that is going on in France and Belgium after a freakish late winter blizzard got these countries all bent out of shape, including the closing of the Frankfort airport in Germany. As a result, it pushed to its best level of the day at a 31 point gain to 14,478 and perhaps this will now stand as some sort of resistance point, of course until it is taken out as well. This high of the day was reached at 10:20am, which goes to show how much credence the market put in those comments. Apparently due to the extreme overbought nature of the Dow’s string of recent advances, some cooling off has to be expected, and as a result it declined to its worst level of the day with a 35 point loss at 2:15pm before chopping irregularly higher to finally end with that hard-fought 2 point advance.
And to illustrate how the Dow was flying solo to the upside, three of its components accounted for 24 points of gains just by themselves, as MRK contributed 10, BA added 9 and UNH added 5 to the overall point calculation.
In the meantime, the other major averages ended nominally lower, as the S&P broke its own streak of a seven-day advance by ending 4 points lower while the Nasdaq fell by 11 after the stock named after a fruit could not stand to behigher for two days in a row after its upside reversal on Monday, and went back to do what it has usually done lately, namely decline. It was joined on the downside by two other large stocks that have done well this year, as opposed to the former, namely GOOG and PCLN, in addition to the has-been’s from the 1990’s, which have done alright this year but from very depressed levels.
And just to show that it was more of a down-day rather than an up-one, breadth numbers ended at a negative ratio of 12/17 while the yield on the 10-year note declined down to 2.02% after having risen steadily by some 20 basis points lately as stocks were rallying on the generally better economic news.
And the VIX put in as strange an upside performance yesterday as its downside efforts were on Monday, as it rose by .71 to 12.27, which in a sense was sort of an equalization process to what had occurred the day before. And one can certainly point the blame for these distortions on the proliferation of ETFs and futures and options contracts that have grown up around the VIX, as the maneuverings in these items for whatever reason can distort what actually takes place with the VIX itself as we certainly saw during the first two days this week. But afar all was said and done regarding it, for the first two days of the week, the Dow has advanced by a net 53 points at the same time that the VIX has declined by a net of .32, which means that it is still giving the major averages the benefit of the doubt in terms of potential future advances.
After yesterday’s somewhat sluggish session on low volume, sort of like the hangover after a big upside party, things are trending to the upside. The Dow began just about unchanged, then made a rapid decline for whatever reason to its low of the day, a 38 point loss at 10:10am, from which level it started to do what it has basically done all year when it is lower intraday, namely to start chopping irregularly higher, and as this is being written, it is close to its best levels of the day with a 14 point advance. The S&P and Nasdaq, which were both slightly ahead even when the Dow was lower, are up by around a point as the stock named after a fruit is doing what it did on Monday, namely starting out lower and then reversing to the upside. In the meantime, it does seem to be refusing to go lower than its recent lows of between 425 to 430, which of course represented only a 280 point decline off of the 705 highs, as the downgrades keep pouring in AFTER the stock has undergone these 40% losses at the lows.
The real hero of the day is the Dow Transportation Average, which is continuing its astounding higher move and is at a new record high once again on the back of strong gains in the trucking stock components. And let us not forget the Russell 2000 at its best-ever level as well.
And of course the market experts today will have an “easy” explanation if the major indexes do in fact end positive, and it will be that February retail sales gained by more than forecast after the January numbers were revised slightly higher as well. The headline number was better by 1.1%, the highest since last September, but excluding autos and gas, it was higher by only 0.4%, as the still very elevated price of gasoline at the pump always distorts the number to the upside. The most important sector of this report is the so-called “core sales”, which eliminate automobiles, gasoline and building materials and most closely correspond to the consumer spending component of G.D.P., and this rose by 0.4% as well.
After taking the day off yesterday, bond yields are rising a bit as the yield on the 10-year Treasury note is back up to 2.05% on the stronger retail sales number, and the dollar reached a three-month high against the Euro on this report as well, as the common currency fell to 1.2950. The stronger dollar is hurting the price of gold a bit, which had found support at around $1,560 and moved up from that level until today. Crude oil is vacillating around in a narrow range.
The VIX is once again helping the market to reach higher levels, as it is lower by .08 to 12.19 relative to the current Dow advance of 14 as this is being written. And breadth numbers are improving as the major averages themselves have gotten better, with a current upside ratio of 17/12. And of course if things do finish on the upside, the reason that will be offered was the better retail sales report, which of course was released at 8:30am and which did not prevent the market from reaching those morning lows as mentioned above, but in another example of the buy on the dip mentality that has been the feature of the market this year, it now appears that as long as the VIX remains above its ultimate downside support level of 10, stocks can still move higher even from current levels.
We have been pointing out 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 stocks like SPPI, EXPR and DOLE are all lower while the market is trending higher.
Economic reports this week will include – Thursday – February C.P.I., weekly jobless claims; Friday – March NYState 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}.