The second-quarter began yesterday in a less than auspicious manner after both the Dow and S&P ended the first-quarter last Thursday at new all-time closing highs. In fact, it turned out to be the first lower start to a quarter since the fourth-quarter of 2011, which meant that the first-day of the quarter winning streak came to an end after five straight higher moves. And it was also a bit disappointing for the bullish crowd (which of course is being made up for today) because April is either the best or second best month for the averages, and I believe for the Dow it is but for the S&P it is December.
And after the long holiday weekend, the Dow did try with a fast 27 point gain right out of the opening gate to reach its best-ever intraday level with a print of 14,605 by 9:45am. When the March ISM Manufacturing Survey rose by the slowest pace in three months, things decided that perhaps a little cooling off was in order, as the Dow proceeded to decline to its low for the day at 11:30am with a 47 point loss. But being the thoroughbred that it has been this year, from those lows, it began the process of grinding back to the upside, and started to chop back higher and finally ended with a closing decline of only 5 points, which was much better than the rest of the market. This was due to the peculiar construction of an index with only 30 members, as a very late rally in the shares of component UNH accounted for the equivalent of 13 higher Dow points. This sharp late advance was the result of Medicare Advantage 2014 rates being raised for a number of health insurance companies, including HUM, WCG, HNT, UAM and UNH, all of which also rallied late yesterday and are continuing their advance today as well. In addition, other Dow components were higher and they each contributed 5 upside points to the total as well – CVX, XOM, PG and WMT. This meant that five Dow stocks accounted for 33 upside points even though the overall index ended lower by 5 as mentioned earlier.
Just to show how out of synch the Dow was with the rest of the market, breadth numbers were at a negative 9/21 ratio and once again the VIX rose by more than it should have with a gain of .88 to 13.58 and the last time it was at this level was on March 22 when the S&P was at 1556 versus the 1562 level that it closed at yesterday, and after today’s new highs in both the Dow and S&P, this is a perfect example of how this peculiar behavior on the part of the VIX still allows the market room to keep advancing.
The yield on the 10-year Treasury note declined to a four-week low at 1.84% on the ostensibly weaker ISM report. The Euro once again found support under 1.2800 and rallied a bit back up to 1.2848 while crude oil declined a little from what I believe are ridiculous levels relative to the supply/demand fundamentals which show supplies rising to a 22-year high. It ended below $97 a barrel for which we should be thankful, I guess.
The worst performing stocks were those in the resource, mining and manufacturing areas due to the weaker ISM report, and all of this took place on the second lightest volume of the year, perhaps because it was still a holiday for one religious group and that holiday ends after today’s session. The Dow Transports suffered a huge decline as well, and is starting to fade back from the all-time highs that it reached last month.
So what happened to yesterday’s hand-wringing over the ostensibly weaker February ISM report, as the market today is undergoing a classic “Turnaround Tuesday” as the major averages started out higher and never really looked back, as the Dow kept pushing to its best level of a 112 point gain at 11am, from which it has come down a bit and is currently ahead by only 93 as this is being written. Of course the high print of the day establishes a further new all-time high at 14,684 and what else is new? And as mentioned earlier, those health insurance stocks are continuing to build on yesterday’s very late spike as for instance component UNH is contributing 26 Dow upside points just by itself.
Breadth numbers are at an 18/11 positive ratio, which once again shows that the Dow is doing better than the broader market because yesterday they were worse on the downside compared to the Dow advance of 5 points and today they are not reversing yesterday’s 9/21 ratio on a day when the Dow is very strong. And the VIX, bless its heart, is once again allowing for continuing gains as it is declining by less than it should be relative to the Dow advance with a loss of .71 to 12.87 and we will compare where it closes today with the last time it was at this level and where the S&P was on that date, similar to what we did earlier in today’s notes.
Treasury yields are up a bit at 1.86% as those who bought yesterday on the ostensibly weaker ISM report are now saying that today’s better February factory orders report, which gained by more than expected due to better vehicle and aircraft activity, means that the economy is now stronger, as opposed to yesterday when it was supposedly worse, and so it goes. The Euro is slipping a bit, but still above that 1.2800 support level as unemployment in the E.U. rose to a record high in February, which still mires them in a recession. In addition, a purchasing managers’ report came in with a declining mode as well.
Perhaps the best part of today’s session is that unlike other times when stocks have been strong, crude oil is continuing yesterday’s nominal decline with a another small drop down to around $96.65 a barrel with those 22-year supplies in front of it. And gold is getting sold off again, as it loses its safe-haven appeal as the Cyprus situation has certainly not prevented our market from reaching record levels.
And for a change the Nasdaq is keeping up with the Dow as the stock named after a fruit is rebounding after declining sharply over the past four sessions, with yesterday’s drop of 14 points particularly bizarre, and now we know the reason. Apparently the investment banking house that is often at the center of controversy removed the stock this morning from its “Conviction Buy List” which of course pushed it right into support between 420 to 430, from which level it has made a nice turnaround of as much as 9 points, at least for today.
Now I am not naïve enough to think that someone was not aware of this and perhaps this is the reason for the recent 39 point decline this past week alone, and is hopefully going to be another example of a “downgrade” that pushes a stock to its lows, from which it tries to build a good support level for perhaps an eventual move higher. And it never ceases to amaze me how “smart” some people are that they were able to correctly anticipate the downgrade and push the stock sharply lower in the four sessions before this one. And in addition, the Nasdaq is being helped by continued recent good gains in GOOG, along with AMZN and PCLN.
This week will see some economic reports that will be topped off by the March non-farm payrolls report this Friday and more on that as the week moves along – Wednesday: ADP estimate for the jobs report, March ISM Non-Manufacturing Survey; Thursday: weekly jobless claims; Friday: February trade deficit and the March jobs report for which the current estimate is for 196,000 versus last month’s 236,000.
Earnings are on the light side ahead of the start of the bigger reporting period the second week of April but we do get: tonight: PBY; Wednesday: CAG, MON and Thursday: WDFC.
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 now for a loss of 1.8 % in the first-quarter of 2013.
The S&P trades at 14.2 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 and it has been 14.4 for the last 10 year’s average.
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% in 2013, 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}.