This is starting to get serious, as the Dow has now undergone two triple-digit losses in the past three days, which could be a sign that the “buying on the dips” strategy that worked so well earlier in the year is not a given at the present time. And the market action starts to remind a person of the prior three years, when things started rolling over in April and then underwent declines from the May to August period that averaged 7.1%, and this of course follows the historical seasonal pattern of “sell in May and go away”, but only until the early fall when things usually start to rally into the end of the year.
The Dow gapped down lower on the opening and really did not have much of a chance as it reached its worst level of the day with a 196 point loss after 11am, from which level it began to chop irregularly higher and finally ended with a closing decline of 138. Breadth numbers were lousy at a negative 1 to 3 ratio and the VIX did it again on the upside, rising as much as 3.94 points when the Dow was on its low before finally ending with a closing advance of 2.55 to 16.51 and both of these numbers were twice as much as normal. The Nasdaq fell by more than it should have relative to the Dow, as it has lagged this year due to poor performances from many large technology stock, and the one named after a fruit continued its miserable 2013 performance by trading with a “3” in front of it for its lowest level since December, 2011 despite its still loyal legion of bullish analysts with price targets as high as 888.
And the only good thing that has come out of the recent correction in the market is that the price of crude oil continues to come down to more realistic levels with a large decline of $2 a barrel, and ended at $86.68 as inventories in the U.S. are at their highest levels in 21 years and both the I.E.A. and OPEC both lowered their demand forecasts this year, which brings into question what were prices doing over $97 not too long ago, which had to put the hurt to consumer spending as gasoline prices at the pump were the highest ever for February and March.
The Euro finally got sold off to more realistic levels closer to 1.300 after a 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.
Various groups got hit hard as a result of weak earnings from representative stocks in those groups, as for instance financials did poorly on disappointing results from BAC, which has left that stock with humungous numbers of calls that will be worthless for tomorrow’s monthly options expiration, materials were lower because of poor results from TXT, and not that technology needs an excuse to go lower, but semiconductor stocks and other techs were negatively influenced by poor results from CRUS and LLTC.
With the earnings season underway, of the 82 S&P companies to have reported as of yesterday, the results have been for a gain of 1.9% and 72% have beaten on the profit side while only 44% have topped revenue forecasts, which is much lower than the traditional consensus.
Not helping either was the fact that the I.M.F. lowered its growth forecast for the world economy down to 3.3% after a 3.2% gain last year, and this has now become the fourth consecutive lower forecast. 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 on Monday.
The Fed Beige Book, released at 2pm, said that the economic expansion is showing a “moderate” gain in manufacturing, housing and vehicle sales and this contrasts with weakness in defense- related industries, obviously due to Federal budget cutbacks.
The market started out mixed to lower today with the Dow trying to do a solo job into unchanged early but that did not work out too well, as two lower
reports at 10am sent it into negative territory in which it has languished so far, as the April Philadelphia Fed manufacturing Survey came in at 1.3 from 2 and the March L.E.I. moved into negative territory at 0.1% from last month’s positive 0.5%, its first decline in seven months. Weekly jobless claims rose a bit by 4,000 up to 352,000.
As a result, it declined to its worst level of the day so far with a 90 point loss right after the 10am release of those two reports, from which it has worked its way back to a decline of 30 as this is being written. Breadth numbers are mixed and the VIX is higher by .50 to 17.02, still more than normal. And once again the Nasdaq is lagging badly with a loss of 22 relative to that Dow decline, and surprise, surprise, it is the former high-priced tech leaders that are declining the most, with the stock named after a fruit sinking even further away from the 400 level and is now 44% off of its record high ahead of its earnings next week, and how bad are they going to be to justify this type of price? In addition, we are seeing large declines in two high-fliers ahead of their reports tonight, namely GOOG and ISRG, in addition to IBM, and how bad are their reports going to be to induce this type of negativity? Then there is AMZN, which has sort of faded out ahead of its report next week and PCLN, the subject of a negative story in the major weekly financial publication. And in addition, there were further weak reports last night from EBAY, NOK, whose price does not have much left to it, and SNDK, which actually had a good report, but is down nevertheless. These are all contributing to weakness in technology.
The Dow is being hurt by a weak report from UNH but VZ is doing well. On the additional positive side, PEP has reached a new all-time high, typical of the consumer staples issues that are one of the groups that have led the market higher this year. BTU is gaining ground as well, which indirectly is helping some energy stocks recover from their recent weakness, including the two Dow issues in this area, namely CVX and XOM. Other losers of interest today are MO and MS, while Dow Transport component UNP is at a new all-time high on its report calls, which most of the time turns out to be a worthless exercise. And in the biggest surprise of all, INTC actually has had the nerve to go up after its earnings report Tuesday evening.
So as is typical of earnings season, we are seeing individual issues react one way or the other to their reports, while the S&P has undergone its worst correction so far this year, with a 3.2% decline from last Thursday’s high. And tonight the fun will continue with high-flyers CMG, ISRG and GOOG, and all are lower ahead of these reports, which hopefully lowers the bar for all of them.
Bond yields are a little lower as the 10-year maturity is down to 1.68% while both crude oil and gold are getting a little upside bounce from their recent large declines. The Euro is also up a bit after Spanish bond yields for the 10-year maturity reached their lowest yield level since September 2010.
This week is a big one for earnings, with tonight – Dow component IBM, plus high-fliers CMG, ISRG 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 for the week are finished.
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 1.9% 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 14consecutive 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}.