After last week’s worst performance since November, things began to stabilize yesterday, as the Dow opened with a fast 32 point advance which then turned into a 15 point decline just in time for the 10am release of the March existing home sales report which showed a slight decline as opposed to the slight gain that the experts had predicted. This was all that a still shaky market needed to see, as the Dow used this as the excuse to decline to its worst level of the day with a 90 point loss at 10:30am. From those lows, it began to chop irregularly higher, led for a change by the Nasdaq, which went positive by 10:45am before finally ending with a 27 point closing advance. This forced the Dow higher as well and it ended higher as well, with a 19 point advance.
Breadth numbers got better as the day moved along and ended at a 17/12 positive ratio while the VIX also declined, losing .58 to 14.39 after being as high as 16 on the market low as mentioned above. The Dow was hurt to some extent by the continued hangover from the poor earnings reports last Friday from GE, MCD and IBM, all of which extended their declines from that day. We saw the opposite dynamic from MSFT, which continued to extend its gains after a positive reaction to them as well during Friday’s session. The Dow was also helped by a new all-time high in the shares of DIS.
There were also some strange moves in other components and in a sort of revenge of the nerds situation, shares of beaten-down CAT, lower by 28% over the past year, opened lower after its poor report but then did a dramatic upside turnaround to put in its best showing since late February. And how about AAPL, down by 45% in the past seven months, getting a bit of revenge against its sellers by moving nicely higher ahead of tonight’s closely watched earnings report. Then there was the strange price action in the shares of GOOG, which fell in one trade from 793 down to 775 before recovering just as fast back up to 793 before closing at 800. And what recourse does the person who got sold out at 775 have in terms of being the victim of what is supposed to be a “fair” market? Nada, as they would say in another language. Perhaps the lesson here is that a person should not use market orders when trading these types of volatile stocks. Limit orders would seem more appropriate.
Bond yields remained quiet with the 10-year at 1.69% and it appears not to want to go too much lower for the time being and the Euro was quite as well. Crude oil on the other hand, could not stand to be left out of the upside in stocks and decided to rally as well, up to around $89 a barrel after being as low as $85.50 during last week’s panic selling in equities.
Well, well, well, after last week’s worst performance since November as mentioned above, the bulls are really taking out their revenge on the nervous nelly crowd, represented by buyers of VIX calls and other puts on indexes and individual stocks to ostensibly “protect themselves, and they are taking a major league beating today, as the Dow opened around 70 points higher and has never looked back. It is currently ahead by 150 as this is being written, near its best level of the session. (Note: that phony story ostensibly from the AP will be dealt with in tomorrow’s notes).
Breadth numbers are at a powerful 5 to 1 positive ratio and the VIX is lower by much less than it should be, down by .88 to 13.51 and the last time that is was at this price was on April 1st when the S&P was 1562 versus the 1579 level that it is currently at, and how many times have I pointed out that it is the panic buying of the VIX and its related options and ETF products that pushes it up by more than it should be, which then moves it well above support levels and then allows the market further upside room to advance, and so it goes.
Bond yields started out lower, with the 10-year in a bit of a panic mode which got the yield down to 1.64% on a knee-jerk reaction to the fact that European bonds rose, as for instance the yield on the Italian two-year maturity fell to a record low as E.U. manufacturing declined for a 15th straight month. In addition, Spanish and Portuguese bond yields declined to their lowest levels since 2010. And how about record low yields in both France and Ireland yields on a report that German services and manufacturing unexpectedly declined.
Add this to an earlier report from China that their Purchasing Managers’ Index for April declined as well, and one can see the signs of a slowing worldwide economy.
The March new home sales report came in better than expected, which is giving a tremendous boost to the homebuilding stocks and once again we are seeing large moves in individual issues based on their reports, and the technology sector is all bulled-up for a change as the result of a huge gain in the shares of NFLX, and the sector is going into a bit of an upside panic as the shares of the stock named after a fruit are continuing yesterday’s strong advance with another good gain going into tonight’s hotly and endlessly debated earnings report and potential dividend increase. The other tech high-fliers are also doing well such as GOOG and PCLN.
The Dow is being helped by earnings-related gains in the shares of DD and TRV but UTX is selling off after its numbers. And how about IBM, which got clocked to the downside for its largest loss in eight years last Friday and further losses today, which is having a strong gain that is accounted for 32 upside Dow points on its own. Other gainers of note include COH with a very strong performance after the stock had fallen 40% from last year’s high, and even TXN is doing well after its report which is also helping the overall technology group. And for good measure, the financials are also doing well after their generally weak recent earnings, which shows that today is one of those days when a rising tide is lifting all ships, so to speak.
The Euro is selling off as it should be, down to around 1.300 on those weaker reports as mentioned above which is raising speculation about a rate cut by the E.C.B. Crude oil is back to around unchanged after initially being lower but could not resist the upside temptation in stocks, and gold, which made that terrific $100 recovery off of that bizarre selloff last Monday, is easing off a bit as it settles into a new lower trading range.
This is the major week for first-quarter earnings, with 160 S&P companies reporting, and here is the lineup: tonight – AAPL, AMGN, F, PNRA, VMW, YUM plus Dow component T; Wednesday – AKAM, CAKE, CTXS, EMC, F, QCOM, S, WYN plus Dow components BA and PG; Thursday – AMZN, BIDU, DOW, MO, BMY, ELY, COP, CSTR, CL, CROX, DOW, HOG, HSY, JBLU, LVS, LVLT, NYT, LUV, OXY, SWK, SBUX, UPS plus Dow components 3M and XOM; Friday – Dow component CVX plus TYC.
Economic reports include – Wednesday: March durable goods orders; Thursday: weekly jobless claims, KC Fed Manufacturing Activity for April; Friday: first estimate of 1Q 2013 G.D.P., preliminary April 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 2.1% in the first-quarter of 2013, down from the original projection of 4.3% in January but higher than the 1.5% estimate on April 1st.
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}.