After it looked like the S&P’s streak of doing the opposite thing from what it had done the day before was about to come to an end in the sense that it had gotten clocked on Friday as a result of the weak jobs report and was lower for the earlier part of the session yesterday, the major averages turned around to the upside and closed higher, which meant that this peculiar streak was still alive for the 14th straight session.
The Dow began with a loss of 67 points by 10:30am, probably in order to satisfy those who wanted to sell after Friday’s lower session and was still 60 points lower at 12:30pm when it began to move higher until an upside acceleration at 1:30pm got it into positive territory by 2:15pm, from which it kept going and closed with a gain of 48 points. The S&P followed along as well, and actually did better than the Dow with a gain of almost 10 points, which partly made up for the discrepancy from last week, which was pointed out in yesterday’s daily market notes, whereby it declined much more than it should have on a relative basis versus the Dow. Breadth numbers were very strong at a better than 2 to 1 upside ratio, which meant that there was greater upside participation for a change from the other areas of the market as well.
The VIX more than cooperated at the end, as it was originally higher by .58 when the Dow was on its low and when the major averages turned higher, it made a very late downside acceleration to end with a .73 point loss down to 13.19, which in a sense puts it one good up-day away from what has turned out to be a very recent strong support level in the 12.70’s.
The outside markets went their own ways as the yield on the 10-year Treasury note rose to 1.74%, partly as a reaction to what might have been a bit of panic buying after the release of the jobs report, which pushed the so-called “flight to safety” trade perhaps a bit too far, as there now seems to be good support in the high 1.60’s yield level, which by the way was reached yesterday as well during the early selling in equities. The Euro once again refused to break the 1.2800 support level and moved a bit higher over 1.3000 while crude oil decided that enough was enough on the downside and gold sold off a bit after its strong rally after Friday’s jobs report on the assumption that Fed easing is going to be with us for a long, long time.
For those statisticians out there, the14 consecutive opposite day movement in the S&P, which began on March 19th and continued through yesterday, has been toward the upside winning out on a relative basis to the downside, as on the day when the streak began, it was 1548 and it closed at 1563 yesterday, so the overall momentum still appears to be higher.
As far as “reasons” to explain yesterday’s upside intraday reversal on light volume in the absence of any earnings reports or economic news, most experts attributed the price action to “positioning” ahead of the first earnings report of the season, namely that 8 dollar stock that for some reason is still in the Dow, and it is otherwise known as AA.
What all of the drifting around lately probably represents is caution ahead of the reporting period for earnings because during the past three months there have been 86 companies issuing profit warnings as opposed to only 24 with positive guidance. This negative/positive ratio of 3.58 is the highest in the past seven years. Financials and telecom are projected to show the best earnings gains, at plus 11% and 6% respectively while energy and health care, which have done well this year, are projected to report earnings declines of 4.5% and 3.5% in that order. And for want of anything else, this is probably as good an explanation as any for the recent drift.
The main question for today is – will the S&P continue on its bizarre historical streak of ending the day in the opposite direction of the previous day for the 15th straight time, as since March 19th we have seen 7 higher closes and 7 lower closes in reversed order, and if this pattern is going to continue, then the S&P will have to end the session negative.
And earlier it appeared as if this was going to be the case, as the Dow fell to its lowest level of the day with a 15 point decline at 10am, after a higher start of 36 points for whatever reason. It then went into less nominally negative territory two other times, with the S&P also following along on a bit of a weaker basis after yesterday’s much stronger than the Dow relative performance. At 11:30am, all of the major indexes accelerated a bit to the upside and as this is being written, the Dow is higher by 60, its best level of the session and the S&P is ahead by 5.2, so one can see that the ratio is not favoring the latter. Breadth numbers are getting better and are currently at an 18/11 upside ratio.
Perhaps what is helping the market the most is that the VIX has exhibited real skepticism today as for instance when the Dow fell to its worst level with that 15 point decline as mentioned above, the VIX jumped out to a .49 point gain, much more than it should have. So in a sense this is the best possible combination, namely a VIX that gets too high on the upside and which allows the market room to continue to advance. Basically this is the dynamic that we have seen all year and have pointed out on so many occasions recently. It is currently only nominally lower by .08 down to 13.11, obviously much less than it should be relative to that 60 point Dow advance.
Today is also a bit of a revenge of the nerds day, as the best performing Dow stock is the one that has done the worst this year, namely CAT and GOOG, which has gotten blasted to the downside for the past four days, is also doing better.
Yesterday’s “big” news was the earnings report from that 8 dollar Dow stock, and it is acting in the way that it usually does, namely very small movements on either side of unchanged on the road to nowhere for this one. And when all is said and done, the main purpose of the market action in this issue is to crush the 8.50 call buyers and the 8 put buyers for this Friday’s expiration, and what else is new? Its results are not even worth talking about, and perhaps there will be more significant insights from two large financials on Friday,
April 9, 2013 namely Dow component JPM in addition to another large financial issue, namely WFC.
As the market has moved higher, the day is beginning to get the feel of an old-fashion “risk-on” day in the sense that the Euro continues to gain against the dollar, now up to 1.3090 and that is whetting the appetites of crude oil and gold traders. The latter item is moving higher after the financial media was blabbering about it entering a bear market with a decline of almost 20% when it reached last week’s low at $1, 542 after a fall from the all-time record high of over $1,900 an ounce reached in September 2011. One would like to think that after a 20% decline, an item would appear to be more reasonably valued and therefore more of a buy than a sell instead of the media trying to spin it the other way – in other words, it is about to enter into a bear market so now you have to sell! Crude oil is rising for no other reason than equities are steadily improving so this must mean that world economies are getting better and therefore the demand for energy will improve, and why not.
Earnings reports for the rest of the week include – BBBY on Wednesday and JBHT, PIR and RAD on Thursday; Friday – JPM, the second Dow component to report and WFC.
Economic reports will include: Wednesday – the minutes of the last Fed meeting, always important; Thursday – weekly jobless claims; Friday – March advance retail sales, March P.P.I. and the April preliminary U. of Michigan Consumer Sentiment Survey.
First quarter earnings rose by 6.2%, increased by 5% for the second-quarter, were flat for the third-quarter and were 6.3% higher in the fourth-quarter. The current projection is now for a gain of only 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}.