If a person thought that the Dow was out of synch with the rest of the market on Monday when it was nominally lower by only 5 points while breadth numbers were horrible and all other indexes took more of a downside beating, take a look at yesterday’s disparities. To start with, even though the Dow ended with a good gain of 89 points, overall breadth numbers were actually negative by a 14/15 ratio. In addition, the Dow Transportation Average took a beating for the second day in a row, while the Russell 2000 Index of small stocks and the mid-cap indexes were lower as well.
And if one looks at the composition of the Dow gain, it came about because of good performances in 9 of its components, with UNH once again leading the way for the second day in a row as it accounted for 21 Dow points just by itself, as the health insurance stocks rose sharply once again after Medicare Advantage 2014 rates were raised for a number of them. In addition, IBM accounted for 15 points of Dow advances, HD and PG for 10 points, and other stocks such as MCD, 3M, DIS, JNJ and WMT contributed between 9 to 5 higher Dow points.
The Dow began the day with a fast rise to a 112 point advance by 11am, and then chopped around at the higher levels before falling to its worst level of the session with “only” a 48 point gain at 3:45pm, before another very late upside spurt pushed it back up to that final advance of 89 points as mentioned above. Volume expanded very sharply going into the close for whatever reason. The VIX cooperated by declining by just about what it should have relative to the Dow advance with a drop of .80 to 12.78.
And once again the peculiar movements of the VIX are allowing for the S&P to keep grinding higher, as the last time it closed at this level was on March 26th, at which time the S&P was 1564 as opposed to yesterday’s 1570.
The outside markets saw the 10-year Treasury note yield rise a bit to 1.86% on the fact that February factory orders rose by 3%, the most in five months due to strong motor vehicle and aircraft sales, and this report was also used as the basic justification for the higher Dow and S&P performances as well. The Euro keeps hanging in there just above that 1.2800 support level but gold got blasted to the downside with its largest decline in five weeks, as it slowly and steadily loses its supposed “safe-haven” appeal value after rising for 12 consecutive years from as low as $255 back in 2001.
The shares of the stock named after a fruit started out lower on a downgrade from the large investment banking house that is often at the center of controversy, as the stock was removed from the company’s “Conviction Buy List.” This is after it had already declined by 34 points in the prior four days, and it always amazes me how smart some people are that they know to sell in advance of this type of downgrade. After satisfying those who wanted to sell after this downgrade was made public, another 2.5 lower points, the stock turned around and wreaked some sort of vengeance on its detractors by rallying as much as 9 intraday points before turning lower once again, but was able to grind out a closing gain of .88 cents during that very late upside spurt for the major averages as mentioned above. It certainly has taken on the appearance of being a “wounded duck” as any sort of ongoing rallies are met by sellers and it would appear as if this situation is not going to change until their earnings report later this month.
And talking about this investment house and its recommendations, another stock that they downgraded was HPQ, which has been the best performing Dow stock this year at a gain of almost 70%, albeit from very low levels. But interestingly the gains came to a halt on Monday, the day before the downgrade was issued yesterday morning, which caused further selling in this stock and once again I marvel at how smart some people are that they knew to sell out on Monday the day before it really came under strong selling pressure yesterday.
And following a strange pattern, if things end lower today as it appears they are going to, the S&P will have now reversed course for the past 11 sessions in a row. Despite this completely zigzag pattern, the index has advanced from the 1548 level it was at on March 19th to its current level of 1561. And just as better economic reports have been used to justify the recent market advances, today’s “excuse” for the lower move was that the March ISM Non-Manufacturing Survey expanded at the slowest pace in seven months and the ADP estimate for Friday’s March jobs report was the smallest gain since last October with a forecast of 158,000 as opposed to a revised 237,000 for last month.
As a result, even the Dow is letting some air out of its extended upside balloon, but not before starting with a fast gain of 21 points to 14,683 before starting to decline even before the 10am release of the ISM report. Today’s high compares to yesterday’s best-ever intraday level of 14, 684 and might the word “resistance” come back into investor’s lexicon? It might until the next time that these numbers are taken out on the upside as well, but for the time being, this is the level to beat. At the 10am release time of the ISM report, the Dow was already lower by 22 points, from which it proceeded to extend its decline to its worst level of a 74 point loss at 11:10am, from which level it is trying to dig in its heels and is currently lower by 58 as this is being written.
Breadth numbers are once again worse than the Dow’s performance at a horrible 1/3 downside ratio and the VIX is higher by just about what it should be at a gain of .57 to 13.35. And once again there are a few Dow components that are doing well as BA, MRK and UTX are accounting for 23 points of gains just by themselves, which is lessening the Dow’s loss relative to the rest of the market, and this has been the pattern we have seen for most of the year. On the other hand, the financials continue to weaken from their very strong out of the gate advances earlier in the year, just about at the time when even the most reluctant bearish analysts in this group, one in particular, changed their recommendations from sell to buy right at the top, and so it goes, but the story for this group might not be over yet.
And also following a see-saw pattern, the yield on the 10-year Treasury note is declining once again on today’s “weaker” reports when yesterday it rose on the “stronger” factory orders number. It is currently down to 1.83%, still well within its recent range. Perhaps the best thing about today’s market is that crude oil is declining by the most in six weeks after the inventory report officially showed that supplies rose to their highest level in over 22 years. As a result, the price is down to around $95.50, which is basically where it was about two weeks ago before these excessive supplies were known, which still makes me believe that prices are still too high at current levels.
Attention will now turn to Friday’s jobs report, especially with the lower ADP number compared to the still official estimate of 205,000 private payroll gains by the experts who are asked to figure these things out. I would assume that as long as the official number does not come in below the ADP estimate this morning, then the market can deal with it because it is lower today. A number closer to the 205,000 estimate would probably lead to a rally, especially if the market were to decline tomorrow for the second day in a row, something that has not happened since the March 19th zigzag pattern as mentioned above. If the number comes in below the ADP estimate, then things could actually keep moving lower, so we shall all be smarter at 8:30am Friday morning.
This week will see some economic reports that will be topped off by the March non-farm payrolls report this Friday – Thursday: weekly jobless claims; Friday: February trade deficit and the March jobs report for which the current estimate is for 196,000 total jobs including government, 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: Thursday: WDFC.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, were flat for the third-quarter and were 8% 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}.