After Monday’s downside debacle, which means that there have only been three higher Mondays for the Dow in its record-setting 2013 year so far, the market underwent a classic “Turnaround Tuesday” yesterday, as the Dow opened right away to the upside, as if the debacle from the day before never took place with a 120 point gain, then dipped to its “worst” level of the day with an advance of “only” 60 points as 10:45am, from which it started to move higher once again before making a late upside charge in the last hour, which is the complete opposite of what it had done the day before, to finally end at its high with a 157 point closing advance. And similar to what is happening today, the various stock index futures traded in the complete opposite direction that evening to what they did during that day, as despite Monday’s downside shellacking, those futures gapped higher in the evening and kept going to the upside the following day. This is similar to what happened last night in the sense that the various stock index futures started trading lower after having been higher during the day session, and this has gotten more exacerbated to the downside, similar to how things got pushed to the upside yesterday.
And believe it or not, after the worst decline for the S&P since November 2011on Monday, it put in its second-best upside performance of 2103 yesterday and the Dow gained by the most in had in seven weeks.
Breadth numbers were strong at an almost 5 to 1 upside ratio and the VIX declined by more than it should have relative to the gains by the major averages, similar to how it rose by more than it should have on Monday relative to the equity declines. It lost 3.31 points down to 13.96, and the last time it was at this number was on April 5th when the S&P was at 1514 compared to 1553 yesterday, which means that it should still give the market more theoretical room to move to the upside.
And once again we saw (ho, hum) the outside markets mainly act the way they are supposed to, as the yield on the 10-year Treasury note rose a bit to 1.73% after having declined on Monday’s “flight to safety” day, and which it is doing today as well as a result of the selloff in equities. Crude oil managed to battle its way back to unchanged at $88.70 after having been lower for most of the day because it could not stand to be left out of the upside party in stocks. The Euro made a huge upside move to its highest level in seven weeks, up to 1.3175 after two Fed officials said that our economy still needs stimulus, which means that the QE programs are not coming to an end anytime soon.
And typical of what we have seen this year, on strong days in the Dow, there are just a few components that seem to do the heavy lifting, and yesterday the honor went to DIS and KO, both rising on good earnings and accounting for 32 points of Dow gains just by themselves.
With the earnings season underway, the projection as of yesterday was for a 1.8% gain, a little better than lately thought, with 42 S&P companies having reported.
So what caused the very strong day after the debacle on Monday? Most experts pointed to those comments from the Fed about extending the QE programs, as evidenced by the March C.P.I. joining the P.P.I. with its first decline in four months obviously due to lower energy prices. Then there was the strong March housing starts report which showed that multi-family homes construction rose to their highest level in seven years even though building permits, an indicator of future activity, fell by 3.9%. Not so great was the March industrial production report which showed a gain of only 0.4%, down from 1.1% the month before and this is perhaps one of the reasons why the industrial stocks have done so poorly this year.
Despite the fact that the VIX has been moving higher lately, there were 2.946 million calls for April that expired worthless on today’s opening with the VIX settlement at around 15, while 634,000 puts also went out with no value. This compares to only 296,000 calls that were worth something and 318,000 puts that had value as well. This means that 85% of all VIX options went out worthless, and this is despite the fact that these television touts are constantly urging people to “protect” their portfolios through the purchase of VIX calls, which most of the time turns out to be a worthless exercise.
So what happened today after yesterday’s nice upside comeback? It is really astounding that the sentiment has swung so fast in different directions for three straight days now, although if one counts last Friday, the day after both the Dow and S&P hit new all-time record highs, the major averages have been lower for three out of the past four days, so perhaps some kind of near-term top has been reached and if this is indeed the case, then the market will have followed for the fourth straight year almost the exact same pattern, namely doing well in the first quarter of the year, and then undergoing a downside correction into the late spring and summer months, if that is indeed what happens. In fact, for the past three years, the market has corrected an average of 7.1% from May to August, with the declines actually beginning in April.
With no economic reports except for the 2pm release of the Fed Beige Book, just as yesterday market experts pointed to good earnings as one of the reasons for the advance, today it is poor earnings that are the culprit, as Dow financial component BAC is selling off sharply and what-did-you expect INTC to do, as it is also lower after its earnings as well. This is putting downside pressure on the financials and technology groups, and the latter’s downside is also being greased by poor reports from CRUS, LLTC and YHOO. The Dow Transports are getting clocked to the downside on a poor report from component CSX while the industrials stocks, as if they needed any more troubles, are being negatively influenced by a poor report from TXT. And talking about technology, the stock named after a fruit traded briefly with a 3 in front of it, 43% off of its all-tine high at 705 with its cheerleaders still at price targets as high as 888, and how is that supposed to happen?
The Dow began with a large loss of almost 100 points right out of the starting gate, and this has worsened as the day is moving along and it reached its lowest level with a 196 point decline after 11am, from which it is trying to hold and is down by 155 as this is being written. Breadth numbers are 1 to 4 negative and the yield on the 10-uyear Treasury is also moving in the opposite direction for the third session this week, down to 1.68% on the flight to safety pattern, which has re-appeared after disappearing yesterday. The VIX is having an upside field day once again, currently at 17.23, a much larger than normal gain of 3.27, similar to what happened on Monday. The Euro is getting sold off sharply, negating yesterday’s strange gain, and is back closer to 1.3000 after an official of the E.C.B. said that they might have to cut interest rates if new data warrants such a move, and certainly the data from that part of the world has been nothing but weak for the longest time.
Crude oil is selling off again, the only good thing to come out of the recent overall commodity decline, down to around $87 a barrel on the highest inventory levels in 21 years and this should once again serve as a warning to those participants, and I have re-iterated who they are all the time, that it is ultimately fruitless to push prices of an item to levels that have no basis in reality, as gold lovers have found out to their recent disappointment as well.
With 67 S&P companies having reported, the projection is for a gain of 1.7%, although this can change on a daily basis as it is currently doing. Still, around better than 60% of companies that have reported so far have beaten both on the profit and revenue sides as well, about in line with historical averages.
What also might be contributing to the negative sentiment are reports that various high government officials, including the President, have received mail with ricin, a highly toxic substance, which sort of brings back those awful memories from the period after 9/11 when officials were receiving anthrax-laced letters as well, and this I believe is adding to the negative sentiment, especially after the Boston Marathon bombing two days ago.
This week will be a big one for earnings , with tonight – Dow component AXP plus EBAY and SNDK; 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: later today – Fed beige book; Thursday – weekly jobless claims, April Philadelphia Fed Manufacturing Index, March L.E.I.
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 1.7% 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}.