Oh, no – the market got clocked once again yesterday on goings-on in a faraway land, and this follows earlier selloffs this year due to events in: Italy, when that out of work Italian comedian, Beppe Grillo, was able to get enough votes to prevent any one party from taking control and basically leaving the country without a functioning government; Cyprus, whose banking system is basically a tax haven shelter for wealthy Russians, and which had to re-structure its banks in order to get an E.U. bailout; and yesterday the overseas wall of worry shifted to North Korea, where a 28 year-old dictator president threw a bit of a hissy fit by announcing that his country “formally” informed the U.S. that a “diversified nuclear strike” had been “ratified” but then added the caveat that “no one can say a war will break out in Korea or not and whether it will break out today or tomorrow”, whew, now we can all sleep better.
In reaction to this ostensibly dire warning, the U.S. will deploy a missile-defense system to the island of Guam in coming weeks as a “precautionary move” against North Korea’s ballistic missile threat as the Defense Department said that “this deployment will strengthen defense capabilities for American citizens in the U.S. territory of Guam and U.S. forces stationed there.” Our Defense Secretary added that North Korea presented a “real and clear” danger. Wow, I haven’t heard this kind of rhetoric since the days of the Cold War!
So what all of this led to was the 11th consecutive day when the S&P did the exact opposite of what it had done the day before, and it was pointed out in yesterday’s notes that despite this completely zigzag pattern, the index has advanced from the 1548 level it was at on March 19th to yesterday’s close at 1554. And just as better economic reports had been used to justify recent market advances, yesterday’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 tomorrow’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.
The Dow began the day yesterday as it has been programmed to do, namely go higher, as it jumped out to a fast 21 point gain to 14,683 before starting to decline even before the 10am release of the ISM report. This high compared to Monday’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 136 point low at 3:40pm before finally ending with a 111 point closing loss.
And not even some ongoing advances in favorite Dow components such as BA, MRK and UTX could stop the negative tide, as breadth numbers were absolutely horrible at a 1 to 4 negative ratio. The VIX once again had an upside field day, similar to what it has done this year on any down day, advancing by more than it should relative to the Dow decline, and yesterday was not an exception, as it gained 1.43 to 14.21 and let it be pointed out that there have now been four times recently that the VIX has fallen to what is now its highest support level in the 12.70’s, and these times were on March 20th, March 26th, March 28th and April 2nd. And on each of the following days, the market declined, which for the time being means that things cannot continue to go higher on a regular basis until that level is broken on the downside.
And naturally the outside markets went the way they were supposed to go on a “risk-off” day, with the yield on the 10-year Treasury note back down a bit to 1.82% and most commodities such as gold, copper and crude oil sold off as well. Gold is actually having the nerve to show its first decline of 20% off of its September 2011 all-time high over $1,900 an ounce, copper continues to sag on weak demand and heavy supplies and crude oil is finally getting back to a more realistic price relative to its supply/demand fundamentals, and this is something that I had constantly alluded to when those interested parties such as hedge funds, high-frequency traders, university endowments and others maneuvered the price well above what was justified because it was a “number” that was going up and therefore these buyers were going to make profits for their efforts. In fact, crude oil underwent its largest decline this year with a loss of $2.74 a barrel down to $94.45 which was basically where it was early last week despite the fact that supplies in this country are at a 22-year high.
Some of the indexes that had been the upside leaders earlier in the year, reaching their best-ever levels even before the Dow achieved that honor, have now found that the air at those levels was a bit too rarefied and they had actually fallen below their 50-day moving averages for the first time since late last November, and they are the Dow Jones Transportation Average and the Russell 2000 Index of small stocks.
Will today’s session be the 12th one in a row where the S&P reverses course from the direction it ended at the day before? So far that is the case but the advances in the Dow and S&P are not really being supported by other indexes, which means that the conclusion will not be known until the end of the session.
The Dow began the day with a nice advance of as much as 75 points at what looks like is going to be its best level right after10am despite the weekly jobless claims report showing the highest number in four months, with an unexpected gain up to 385,000 ahead of tomorrow’s all-important jobs report. But let it also be remembered that this is not the survey week used for the calculations. From those best levels, it has chopped to an ongoing series of lower highs and is currently ahead by only 12 points as this is being written. And as is the case with the index that gets distorted one way or the other by individual components, IBM, the highest priced stock and therefore the heaviest weight in the Dow, by itself is accounting for 19 points of Dow losses just by itself as technology stocks are overall weaker today. The S&P is hanging in with a small gain of 1 point, trying for that 12th opposite day as mentioned above.
Breadth numbers are at a positive 15/13 ratio despite the fact that the Nasdaq is once again lagging even when the Dow was at its best level as mentioned above. The Nasdaq has turned negative and appears to be doing what is usually does when it lags the Dow, namely it pulls the entire picture lower. This is due to weakness in what had been one of its leaders which reached an all-time high last month but is now coming back down to earth, namely GOOG, plus the stock named after a fruit that could not stand two days of hard-fought nominal gains and is back doing what it has usually done these past six months, namely go lower, NFLX, which also perhaps found the air a bit too thin at its highs of the past several weeks, and PCLN, among others.
The VIX, after declining by less than it should have when the Dow was on that 75 point high, actually started to show skepticism about the sustainability of the early advances as it went positive just before 10:30am when the Dow was still higher and is currently ahead by .49 to 14.70.
There has been a dramatic move lower in bond yields today, with the 10-year Treasury down to 1.77%, its lowest this year on the poor weekly jobless report and also in reaction to a dramatic move from the Bank of Japan as it doubled its monthly bond purchases in a bid to encourage some inflation in that country, saying it will buy the equivalent of $73 billion of bonds a month. Relative to the size of Japan’s economy, this is the largest monetary stimulus program ever, with its promise to inject $1.4 trillion and this action sent bond yields to record lows, down to 0.425% for their 10-year maturity. And this is a record amount of stimulus because their economy is one-third the size of ours.
Perhaps the only good thing to come out of the recent stall in equities is the fact that crude oil prices continue to decline, with the two-day loss the largest one since last June with the price down to $92.60 and why shouldn’t it be here relative to its very weak supply/demand picture. Gold continues in its own little bear market and the Euro once again found strong support under 1.280 and is just about unchanged at 1.285 after having declined to as low as 1.275.
Attention will now turn to tomorrow’s jobs report, especially with the lower ADP number out there compared to the official estimate of 200,000 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, then the market can deal with it because it has weakened the past few days and is going into the report in somewhat of an oversold condition. A number closer to the 200,000 official estimate would probably lead to a rally. 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 saw some economic reports that will be topped off by the March non-farm payrolls report tomorrow: Friday: February trade deficit and the March jobs report for which the current estimate is for 190,000 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, which we will list in tomorrow’s daily market notes.
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 gain of 1.6 % in the first-quarter of 2013, down from the original projection of 4.3% in January.
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}.