In a day of many twists and turns, things started out in a hesitant manner yesterday with the major averages chopping around between small gains and losses until around 11:20am, when everything started to accelerate to the upside after the Dow was still unchanged at that time. From that point until the highest level of the day, reached at 3pm with the Dow at new all-time intraday highs at 14,716 for a gain of 103 points, things then went back downhill in the last hour.
With that $8 Dow component doing nothing all day and ending unchanged after all of the attention paid to it by the financial media because it is the first Dow stock to report, the only thing that its price action accomplished was to crush the owners of 8.50 calls and 8 puts for this Friday’s expiration, and what else is new in this regard? So with those earnings a complete non-event, the market had to look for other sources of motivation, especially as there were no economic reports either. And after scratching their heads for an “explanation” as to why things decided to accelerate to the upside, the answer now became that the lower Chinese inflation report meant that the central bank in that country could postpone further tightening policies and sure enough, that was the answer, even though the news was already out before the opening when things basically chopped around for the first two hours of the session as mentioned earlier.
As a result, commodities such as crude oil and gold took off to the upside, motivated by this line of reasoning after also doing nothing earlier. And in perhaps the biggest shock of all, the Dow stock that put in the best performance was the one that has done the worst this year so far, namely CAT, which even after today’s strong gain is still down by 4% in 2013 despite the average to which it belongs being ahead by 12%. And for the record, the only other sad-sack member of this group that is lower for the year (by 3%), was the one that reported last night, and it is the second worst performer in this index.
And if this wasn’t the biggest revenge of the nerds type of day in a long time, the other best performers in the Dow were some of its has-been technology components, which have basically been asleep for the past 14 years, and this erstwhile group included CSCO, INTC and MSFT in what had to be one of the most nostalgic days in years for them (nostalgic in the sense that when was the last time that any of these played the role of market leaders?). And talk about a stock which appears as if one day in the future it is going to join these as stocks whose best days are behind it, how about the shares of the stock named after a fruit, lower for most of the day and finally able to eke out a closing gain of less than 1 point on a day when the index that it is still the largest component of, namely the S&P, achieved its second-best price in history intraday, over 1573. And this is after the stock has declined 40% from its high, so its recent performance is nothing to be proud of.
And far as the last-hour slide was concerned, it appeared to be the result of three items, the first of which was something that I have pointed out on a few occasions recently, and that is that there appears to be tremendous support on the downside for the VIX at 12.75 or so, which is the level it fell to when the Dow was on its high, and in that last hour the Dow did decline by over 40 points to finally end with a closing gain of “only” 60. The VIX was trading around 13 when stocks themselves closed and then did a very late move to the downside to finally settle at 12.84, a decline of only .38, much less than it should have relative to the Dow closing gain and this was the pattern all day, namely that the VIX was not down as much as it should have been relative to the gains in the major averages, which once again shows the reluctance at the present time to fall below that 12.70 support area but on the other hand does give the market more theoretical room to advance to the upside as long as it remains above the next two downside support areas, which are 11.30 and then the absolute bottom at 10.
The other two reasons for the late market decline were the result of two indexes that have become sort of flaky in recent sessions, namely the Russell 2000 Index of small stocks and the Dow Transports, both of which made all-time highs before the Industrials did, undergoing a late drop in that last hour to end the day negative, which continues the recent diversion between the generals and the troops, so to speak.
The bond market sort of sat still but the Euro gained against the dollar for the fifth straight day, its longest winning streak of the year after finding that very solid support under 1.2800 and ended at 1.3085. This was apparently the result of strong demand for a five-year note auction sold by the E.F.S.F. and as mentioned above, this got other commodities like crude oil and gold galloping to the upside as well.
Despite the late comedown, the Dow did end at its highest level ever, at 14,173 and the S&P finally broke that bizarre streak of doing the opposite of what it had done the day before after 14 straight days of such behavior. And as a side show to the main action, there were large declines in the shares of two controversial stocks, namely HLF and JCP for reasons peculiar to both companies, a potential S.E.C. investigation and the replacement of its C.E.O. respectively.
And as I have been saying for the longest time, as long as the VIX acts in the peculiar way it has, then the market still has the ability to continue higher as it is doing today with new record highs in both the Dow and S&P once again, ho hum. For instance, as the Dow opened around 50 points and never looked back, the VIX opened dutifully lower as well it should have, and then when the Dow reached its intraday and new all-time high of 14,807 which was a gain of 134 points at 11:50am, the VIX declined by only .52 to 12.32, once again by much less than it should have relative to the Dow advance. Then when the Dow declined a bit from that high to be up by “only” 117 points at 12noon, the VIX had the nerve to turn what had been a lower than normal decline in the first place to an actual GAIN of .04 to 12.88, and if this was not the most ridiculous situation that I have ever seen in terms of the relationship between the Dow, or S&P relative to the VIX, then I do not know what is. And sure enough, this allowed the Dow to then move back to a new all-time high with a gain of 152 to 14,825 which finally caused the VIX to move back down a little bit to 12.54, lower by .30, still way less than it should be and this is why the market can continue to move higher even from these extended levels.
And why is the market up so strongly in the first place? Even before the minutes of the F.O.M.C. meeting were inadvertently leaked this morning ahead of their usual 2pm release time, the various stock index futures were pointing to a higher opening of around 50 points based on news from China that their imports in March rose by a much larger than expected amount, which suggests that their manufacturers and consumers might be spending more. Then when the F.O.M.C. minutes came out, it was an accelerated takeoff to the upside. So what did the Fed say that got everyone so bullish, and the answer is that they actually had the nerve to say that they were nearing a decision to start winding their unprecedented stimulus program. The only problem with these observations is that they were from the meeting on March 19-20th, which was two weeks before the disastrous jobs report last Friday. A few members of the committee wanted to slow down the pace by mid-year and end the program altogether at the end of the year while others danced around this and were not sure as to when the program should be wound down.
Recently whenever the Fed has suggested ending its QE3 program, the market does not like it and tends to sell off a bit, so it was basically because of that weak jobs report that investors believe that the stimulus party will go on, and that for want of anything else is as good a reason that there is for the huge upside move, which is quite astounding.
Breadth numbers are at a powerful better than 3 to 1 upside ratio and once again we are seeing the second revenge of the nerds day in a row as those three technology Dow has-been components from the 1980’s and 1990’s, otherwise known as CSCO, INTC and MSFT, which did really well yesterday, are continuing the upside party once again. And even another stock that could join them in the sense of perhaps having its best days behind it (although the jury is still out on this one), namely the stock named after a fruit which is still the largest component of the S&P despite being still 39% below its all-time high, is having the nerve to rally by 8 points.
The bond market is selling off with the yield on the 10-year Treasury note up to 1.76%, once again making those who rushed in to buy it at the lows of 1.67% on the ostensible “flight to safety” trade after the lousy jobs report on Friday look somewhat foolish. The Euro is down a bit after its strong recent rally and gold is selling off after its recent rally on the perception of the Fed ending its stimulus programs.
So in other words, stocks are rallying because they do not believe that the Fed will end its asset buying programs and bond yields are higher and gold is lower because traders in those markets do take the Fed at its word from the release of last month’s minutes even though they are really out of date. Go figure!
Earnings reports for the rest of the week include – BBBY and JBHT tonight, PIR and RAD on Thursday; Friday – JPM, the second Dow component to report and WFC.
Economic reports will include: 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 1.5 % 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}.