Stocks looked like they were going to surpass the previous all-time high in the S&P, achieved on October 9, 2007 because as mentioned in yesterday’s daily market notes, the various stock index futures pushed to substantial gains in the Sunday overnight session. In fact, the S&P futures at one point rose as much as 8 points to 1560, which if compared to their fair value for yesterday of 6.85 points under the cash, meant that we would have seen a new all-time high in the S&P if these gains in fact held because the S&P closed at 1556.89 on Friday, so for the S&P itself to be 6.85 points above the futures, that would have gotten the market to 1568.50. And this would have broken the previous record.
But alas this was not to be, at least for yesterday, as the Dow got as high as 14,563 at its best 10am Cyprus-related euphoric level, a gain of 51 points which meant that it traded at its highest level ever, breaking the March 20th intraday high of 14, 546. The S&P, where all eyes were focused on the possibility of joining the Dow at its highest trade in history, teased its cheerleaders with a print of 1564.91 at 10:11am, only a mere .24 points away, but then did a fast turnaround to the downside, leaving its believers having to wait once again for this record to fall.
From that Dow high of a 52 point gain, it proceeded to run out of gas in a big way and as a result, it found itself with a loss of as much as 117 by 1:15pm, which was somewhat of a dramatic downside turnaround of 169 points from its best early level. From those lows, it sort of slogged its way higher for the remainder of the session to finally end with a 64 point closing decline. Breadth numbers were at a 12/18 negative ratio and the VIX was actually cutting the market some slack with a rise of only .17 to 13.74. It was really falling to the downside earlier in the session when the major averages were on their early best level with a decline of as much as 1.18 to 12.39, perhaps a little too low for the market to be able to sustain the early advances.
So what happened to ruin the upside party, at least for one day, and disappoint those who thought that the S&P was going to do it? Apparently the hang-up was that the Cyprus rescue plan could be a new way of dealing with E.U. banking problems in the sense that other countries might have to restructure their banking sectors as well, as for instance this country will now have to shut down its second largest bank with insured deposits below 100,000 Euros moved to the Bank of Cyprus, the country’s largest. Uninsured deposits with more than 100,000 Euros will see losses of 4.2 billion Euros, which will be up to 40% of their money. Uninsured depositors at the bank of Cyprus will have their accounts frozen while the bank is restructured and re-capitalized and any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 Euros. Uninsured depositors at the second largest bank, called the Cyprus Popular Bank, will be largely wiped out.
The prior process of governments and taxpayers bearing the costs and providing the back-stop of former bailouts had to stop, according to the E.U. This could now be the end of the plan from last year to allow banks to recapitalize directly, which broke the link between weak banks and shaky governments forced to bail them out. This now means that other highly leveraged banking countries like Luxembourg and Malta in addition to Slovenia could be the next ones to have to strengthen their banks on their own.
The Euro took another dive on this news and ended right at a support level with a close of 1.285, which was down from the 1.305 level that it began the session at when those stock index futures were also at their best overnight and early in the day levels. But never mind crude oil, which once again is starting to ignore the realities around it as those interested parties in this market continue to push it to higher levels which are going to extract a negative penalty from stocks if they keep getting closer to triple-digits, as they ended at $94.81 a barrel.
Bank stocks, which had done so well this year, were among the largest decliners on the potential negative implications for what happened in that tax haven island in the Mediterranean.
After yesterday’s strange downside reversal, the bullish forces were out there once again today but this time it appears that the upside is going to last the entire session, as opposed to yesterday when things went into reverse after the early gains. And as an example of the latent bullishness on the part of investors, two bad reports were basically brushed aside, as March Consumer Confidence plunged to 59.7 from 68 when an increase was expected and February new home sales declined by more than expected as well, with a 4.6% drop. But never mind, that offshore tax haven in the Mediterranean, which caused such agita yesterday was forgotten as market experts pointed out the fact that the January CaseShiller Home Price report showed its largest increase since June 2006 and February durable goods orders increased by more than expected, but excluding transportation they actually declined a bit. What was troubling about this report is that the non-defense capital goods sector, which is a proxy for business spending, declined by the largest amount since last July, but this could also be a function of the fact that last month’s gains in these items were huge.
The Dow reached its best level at 10:30am with a large gain of 101, but has since slipped a bit and is currently 81 points higher as this is being written. Breadth numbers are at a positive 18/11 ratio and the VIX is lower by .70 to 13.04, sort of in line with where it should be. Outside markets are quiet, especially the Euro, which is doing nothing despite all of the anxiety surrounding Cyprus while gold continues to lose some of the supposed “safe-haven” status it gained last week and is back below $1,600. Crude oil is fulfilling its upside destiny with a gain to now over $95 a barrel and so be it.
Retail stocks are weak on a report that sales during the recent bout of unusually cold and stormy weather were lower than projected, especially in the Midwest which has gotten hit with early spring snowstorms lately.
This week’s earnings reports will not be as important as some of last week’s were (ORCL, FDX, NKE, and LEN) but here they are – Wednesday: RHT, TXI; Thursday: FINL, GME, and MOS.
Economic reports for the holiday-shortened week will be more important than earnings and include – Wednesday: February pending home sales; Thursday: third and final 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.

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}.