After declining on the first two days of the week and then stabilizing to some extent on Wednesday, the market decided that the path of least resistance yesterday was lower once again, as the latest market bogeyman, otherwise known as Cyprus, was used as the “explanation” for why things got sold off on the downside.
This came despite the fact that all of the economic reports released here were on the positive side, as the four-week moving average of weekly jobless claims declined to its lowest level since February 2008, February existing home sales rose to their highest level in three years and both the February L.E.I. and the March Philadelphia Fed Manufacturing Survey came in better than expectations.
And what was so terrible about that, but no, the overseas worrywarts came out of the woodwork, as some weaker economic news from Europe (surprise, surprise) put a negative dent on the proceedings, as both a German purchasing managers’ index and an E.U. services and manufacturing index came in lower than expectations, and what else is new in that part of the world? Then we got the blah, blah from that little island in the Mediterranean, which is basically a tax haven and money laundering center for Russian oligarchs, when the E.C.B. said that it may cut off emergency funds to Cyprus banks after Monday unless a plan to ensure the solvency of their banks is put forward. And heaven forbid, good old Standard & Poor’s cut the rating on the long-term sovereign debt of this place by one level, and if that isn’t enough to keep a person up at night, then I do not know what is.
As a result, the bulls did not stand a chance, as the Dow opened around 50 points lower, then rallied to its best level of the day with “only” a 21 point loss at 11:45am before plunging to its lowest point of the day, a 138 point decline at 2pm, from which level it chopped its way back to a final 90 point decline. Breadth numbers were weak at a negative 10’19 ratio and the VIX rose by more than it should have relative to the Dow decline, with a 1.32 point advance to 13.99 after having been sort of even with the decline for most of the session. I assume that the nervous nelly crowd became a little more upset as the day wore on, which was the reason for this higher than expected gain.
The Euro fell to a four-week low against the dollar at 1.289 on all of the ostensibly negative proceedings and crude oil sold off as well on all of the goings-on, and typical of what we have seen in a general sense over the past few years is that the only way we can get lower energy prices is if stocks decline as well, and this is the bargain with the devil, so to speak, that the Fed has made with its QE programs, basically the risk-on, risk-off perceptions. The yield on the 10-year Treasury note also declined, down to 1.92%, still within the recent range, on this risk-off flight to quality perception as well, which will only last until the next up-day like we are seeing today.
Not helping matters either was a very weak performance from one of the old-time Nasdaq stocks that had been enjoying a bit of a renaissance lately, namely ORCL, after its report came in very badly and this had the effect of pulling down other important technology issues as well, such as Dow components HPQ and IBM, which had done well lately, along with another has-been from the 1990’s, namely CSCO, which also sold off as a result.
This weakness means that if the S&P stays below 1560 today, it will be only the second lower week for this index this year, which is a tremendous record, to say the least. And if one wants to look at the Dow, its highest close so far has been on March 14th at 14,539. On March 15th, it also got to that level and on March 20th, it got as high as 14,546, which means that one could argue that there is a triple-top potential resistance level at this area, which will have to be overcome for it to make a new leg higher, if that is indeed the case that is waiting to develop.
So after all of the hand-wringing yesterday about that Mediterranean island tax haven, sure enough things started out higher today and have not looked back so far, as the Dow began with a 40 point gain and accelerated to its best level so far at 11:30am with a 98 point advance from which area it has cooled off a bit and is currently ahead by 80 as this is being written. Breadth numbers are at a 17/12 upside ratio and the VIX is once again cooperating in the sense that after being higher than it should have been yesterday relative to the Dow decline, today it is falling less than it should be relative to the Dow advance, with only a .38 loss down to 13.61, which once again theoretically gives the market more room to rally, and in Monday’s daily market notes we will see where the S&P was the last time that the VIX was at whatever closing level it will be at today compared to where it was the last time that the VIX was at today’s closing level and I am certain that the S&P was lower.
So what is accounting for the sudden bullishness after the first three out of four sessions this week were lower? And the answer is – good question, as the “explanations” being put forth are that there were some good earnings after the first-quarter reporting period had gotten off to a shaky start, with FDX and ORCL getting sold off badly after their reports. So today we have NKE, TIF and MU all doing better after their results, and talk about one of the great has-beens of all time, a 90 dollar stock back in the 1990’s, which is the latter, getting some perhaps not justified upside attention.
And what about Cyprus today, which basically has nothing new to report, as they are now debating new legislation to help release bailout funds needed to avoid a potential financial collapse, and has anyone seen any pictures of depositors in other shaky economies such as Italy and Spain pulling their money out, as was one of the bearish arguments put forward by the nervous nelly contingent earlier this week. On the other hand, one can also argue that the market is being helped today by the fact that some reports out of that place are showing some progress on a deal to raise the necessary money and actually get the needed bailout from the E.U. and prevent its exit from the Euro, so we shall see.
And sure enough, outside markets are doing what they are programmed to do on this week’s events, namely bond yields are up a bit, the Euro is higher, crude oil is up and gold is down, and what changed so much from yesterday to cause these movements?
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.
Next week’s earnings reports will not be as important as some of this week’s were (ORCL, FDX, NKE, and LEN) but here they are – Monday: APOL, DG; Tuesday: PLCE; Wednesday: RHT, TXI; Thursday: CAN, FINL, GME, and MOS.
Economic reports for the holiday-shortened week will be more important than earnings and include – Tuesday: February durable goods orders, January CaseShiller home price index, March Consumer Confidence, February new home sales; Thursday: February pending home sales; Thursday: third estimate of 4Q G.D.P., weekly jobless claims, March Chicago Purchasing Managers’ Survey, Kansas City and Milwaukee Activity reports.
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.

Don 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}.