The fact that the VIX closed around 12 on Friday was perhaps a sign that things were in need of a correction, and boy did we get it yesterday, as the Dow opened with an immediate loss of 80 points, rallied to its ¡°best¡± level of the day with a decline of ¡°only¡± 50 at 11:40am, and from that point on it was all downhill, reaching a 210 point loss at 2:15pm. From this time on, a little rally took place to get the Dow back up to a 160 point loss just before 3pm when news of the Boston Marathon explosion added further downside pressure and a typical last hour collapse when things want to go lower in any event. This finally resulted in a closing decline of 265, its worst level of the day.
Breadth numbers were a disaster at a 1 to 7 downside ratio and the VIX really had an upside field day with a huge gain of 5.21 up to 17.27, and once again this tremendous rise will eventually allow the market to move higher than it was at last Thursday.s record closing levels for the Dow and S&P because the last time the VIX was at this level was on February 25th and on that day the S&P was 1487 as opposed to yesterday.s close of 1552, and this continues the pattern we have seen all year of the VIX getting too overdone on the upside and thus providing the market further and further room to move higher. And then the people who supposedly buy ¡°downside protection¡± and paying very high prices for the privilege end up looking foolish as the major averages then continue to move further to the upside.
The final results for the major equity averages was one of those read .em and weep scenarios, as the Dow underwent its worst showing since November 7, 2012, the S&P got clocked for its worst loss since November 9, 2011, the Nasdaq had its poorest showing since last June as the already weak technology group sort of cratered and it has not done well this year in any event, while the Russell 2000 Index of small stocks put in its worst showing in 17 months.
And naturally on a supposed ¡°flight to safety¡± day, bond yields declined once again as investors rushed into government debt, driving yields on the 10-year Treasury note down to 1.69%, once again near the lower end of the recent trading range. And for some strange reason, the Euro actually rallied a bit and one would have thought that the opposite would have taken place on the same supposed ¡°flight to quality¡± issue, namely running into the supposed safety of the U.S. dollar.
Then of course there was the drama of the day, as gold underwent its largest one-day percentage decline since March, 1980 and its largest point loss of all time, an astounding $140 loss. Of course, it had started listing to the downside late last week on a combination of factors that have been widely disseminated, ranging from a bearish call from the large controversial investment bank, the potential for sales out of Cyprus in order to raise money to meet the terms of their bailout, and to the fact that holdings in the GLD ETF are larger than most central banks, in fact the fourth largest or so in the world, so perhaps a little froth had to be taken away from this group after 12 straight years to the upside.
Crude oil is finally falling back to a more realistic price level relative to its supply/demand fundamentals after the best efforts of hedge funds, fast-money traders and university endowments to push its price much higher than the fundamentals would justify, resulting in record high prices at the gasoline pump for the February and March time period, and what did that accomplish? In addition, both the International Energy Agency and O.P.E.C. itself had already lowered their global oil demand growth forecasts for this year, so why should prices have gotten to where they were in the high $90.s in the first place, if not for the self-interested maneuverings of the aforementioned groups?
So what happened to cause all of the downside misery in the first place, and most market experts pointed to further weaker economic reports here, as the April NY State Empire Manufacturing Survey declined from last month and the April NAHB Housing Market Index showed its third straight monthly decline. But the big enchilada was ostensibly the news from China where their economy had the nerve to rise by ¡°only¡± 7.7% in the first-quarter, heaven forbid, when the forecast was closer to 8% and what difference does this small 0.3% discrepancy make among friends, and this compares to a 7.9% growth rate in the fourth-quarter of 2012, so now all of the market experts can say that their economy is ¡°slowing¡±. The lower forecast came about due to slower than expected increases in their industrial production and fixed-asset investment and raised doubts that the second largest economy in the world would rebound after producing its own weakest growth rate in 13 years in 2012.
It is astounding that in this year of all-time highs in most major averages that 2013 has produced only 3 Mondays when the market rose, but Tuesday is another matter as we are in the process of seeing a classic ¡°Turnaround Tuesday¡± after yesterday.s downside debacle, as despite all of the negative handwringing and the rush to buy so-called ¡°downside protection¡±, the various stock index futures traded immediately higher in the overnight session and continued to get better as this morning.s opening approached. As a result, the Dow began the session with a gain of almost 120 points and after dipping to its worst level of the session with a gain of ¡°only¡± 100, it has continued to chop irregularly higher and is currently at its best level of the session as this is being written with a 148 point gain, and it never ceases to astound how things can turn around so quickly from one day to the next, as after all, what really changed between yesterday.s close and today.s opening?
Breadth numbers are at a 4.5/1 positive ratio and the VIX is taking a downside beating from its bizarre buy-me-protection-at-any-cost thinking of yesterday with a 3.25 point decline back down to 14.02. This will be interesting because the April VIX options stop trading today and will expire on tomorrow.s opening, which means that there are all sorts of possibilities for some major shenanigans with it on today.s close and tomorrow.s early trading and this will be something to watch. And naturally on what has turned out to be so far a ¡°risk-on¡± day, bond yields are rising and even gold is managing some stabilization after yesterday’s historic downside shellacking. Thankfully, crude oil is once again coming lower despite the up-day in stocks and a huge upside move in the Euro despite a weaker than expected German sentiment index.
Economic reports here showed that the March C.P.I. declined for the first time in four months due to lower energy prices and this gives more credence to the fact that the Fed.s QE stimulus programs have not produced the inflation that so many worry-warts who ran into gold had expected. This is probably why the Euro is up so strongly today after having started out unchanged, and it has now reached a seven-week high at 1.3185. March housing starts showed a strong gain with a 7% advance but building permits, an indicator of future activity, declined by 3.9%. The other two reports were sort of neutral as March industrial production rose by 0.4% and capacity utilization was steady at 78.5%.
Today.s gains can also be attributed to good earnings reports from two Dow components, namely JNJ which has been on an upside tear this year at all-time record highs, and from KO, which has made a strong upside move recently. These two are contributing 33 upside points on their own. Other stocks are reacting either up or down relative to their reports, and 41 S&P companies have now reported and we will gather the statistics on how the first-quarter reporting season is going later this week when the total will reach closer to 100.
This week will be a big one for earnings , with tonight – Dow components INTC, plus CSX and YHOO; Wednesday . Dow components AXP and BAC; Thursday . Dow components IBM, MSFT, UNH and VZ, plus MS, PEP, PM, NOK, COF and high-fliers CMG and GOOG; Friday . Dow components GE and MCD, plus BH, HON and SLB. There are 74 S&P members reporting this week and next week will really be the big one for earnings.
Economic reports include: Wednesday . Fed beige book; Thursday . weekly jobless claims, April Philadelphia Fed Manufacturing Index, March L.E.I. irst 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 1.1% 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, with 3% in the first-quarter and then in the low 1.s for the second and third-quarters before a fourth-quarter acceleration to over 4%.

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}.