Oh, no – don’t tell me that the “sell in May and go away” crowd is going to be laughing up their sleeves as a result of yesterday’s worst first-day decline for any month since June 2012, as the market never had a chance. The Dow started out with a 60 point decline and then got down to a 110 point loss at the 2pm time of the F.O.M.C. interest rate statement. After the “experts” had a chance to pontificate with their two-cents worth of wisdom, the market started a bit of a comeback and the Dow was lower by “only” 75 at 2:30pm, at which time it ran out of gas and lagged from that level into the close, which finally resulted in a 139 point ending decline.
I would imagine that what might have gotten investors sort of bent out of shape a bit was that stocks have not had a winning May since 2009, which was still the infancy of the current historic bull market that has now developed in the past four years. And we all know as well that we are now entering the worst seasonal six month time period of the year, so there you go, and that might have also been responsible for the nervous nelly contingent selling out as well.
Breadth numbers ended at a poor 8/21 downside ratio and the VIX once rose by .97 to 14.49, a little less than it should have relative to the Dow decline. The big story was the decline in bond yields as the 10-year hit a new low for the year at 1.63% and commodity prices sold off as well, and this was supposed to show that worldwide economies are slowing down and that there are no inflationary pressures, and of course this will be what the experts say until the next day that stocks in addition to both crude oil and gold rise, as they are doing today, but never mind.
For those who can remember, yesterday’s inventory report showed that domestic supplies of crude oil are now at 82-year highs and resulted in prices declining down to around $91 a barrel after once again finding support at $90. This must be driving the oil companies crazy in the sense that they will not be able to do their usual price gouging ahead of the traditional summer driving season which is rapidly approaching. And for good measure, gold prices got whacked to the downside, but are still within their now lower trading range from the panic-driven low around $1,350 from a few weeks ago to their new resistance levels at $1,485 up to the former strong support area of $1,550.
Yesterday’s declines were led by cyclical, materials, energy and resource stocks on the slowing economic growth scenario, in addition to a selloff in Dow component MRK on its weak earnings report. IBM, which did well after announcing a dividend increase and share buyback the previous day, led the technology stocks lower, although the Nasdaq actually tried to stick its head into brief positive territory before the release of weaker economic reports at 10am. On the other hand, those old Dow warhorses that have done so well this year continued to gain despite the overall negative scenario, and they were DIS, PG, T and WMT.
And the Euro confounded the foreign exchange experts once again by rallying despite economic reports from that part of the world that show disappointment after disappointment in addition to weak purchasing managers’ and manufacturing reports out of China for April, and also on the perception that rates here are going to stay low for a long time.
So what happened to account for all of the talk about economic slowdown? The first “shock” came from good old ADP, they of the awful track record for predicting the non-farm payroll reports. They said that the number of private payroll jobs that are going to be added in tomorrow’s report will be 119,000, which then caused the sheepish analyst community to also lower its projection, now down to 145,000 from 160,000. In addition, March construction spending declined by 1.7% after predictions for a rise and the April ISM Manufacturing Survey came in at 50.7 as compared to last month’s 51.3.
This apparently was too much for an overextended market to take, at least for one day, as that slowing economic scenario was put forward time and again during the session to account for the declines. And then of course we had the Fed statement, and as Casey Stengel used to say – “You can look it up”, and this means the tendency of the market to decline when these pronouncements are released, and based on the description of yesterday’s market meanderings, “the old perfesser” was right once again. Basically they said that they will continue buying $85 billion of bonds each month in order to keep interest rates low and spur economic growth. But they also added the caveat that they are “prepared to increase or reduce the pace of purchases to maintain appropriate policy accommodation”, which was their way of giving themselves the flexibility to either limit or increase these purchases, and this confounded another panel of experts who were “certain” that they would announce a reduction in the monthly purchase amount by the fourth-quarter down to $50 billion or so. They also mentioned that fiscal policy, in other words the mess going on in Washington, D.C. involving the fiscal cliff and sequestration, is “restraining economic growth”.
And earnings season keeps slogging along, with 342 S&P companies that have reported so far, 69% have beaten the estimates, which compares to the average from the last four quarters at 67% and the average from 1994 of 63%. Revenues have only beaten in 47% of the companies, and this compares to an average beat rate of 62% in the last year and 52% since 1994.
And has been so typical of this year in terms of the buying on the dip mentality, all of the negativity from yesterday is now forgotten (at least until we see tomorrow’s jobs report) as the E.C.B. did what most observers thought it was going to do, as it joined other central banks that have already lowered by decreasing their main financing rate to a record low 0.5% from 0.75% as they said that “Our monetary policy will remain accommodative for as long as needed.”
Also helping were the weekly jobless claims which pleasantly declined to the lowest level in more than five years at a loss of 21,000 to 324,000 which took some of the sting from yesterday’s ADP estimate away, even though this is not the survey week used in tomorrow’s report. So now after yesterday’s shellacking, everything is coming up roses today, as the stocks that got hit the worst to the downside are the ones that are doing the best today, such as materials, cyclical and energy, which of course is a wonderful example of how not to count one’s blessings in this business too fast as things can turn on the literal dime, so all of the put and VIX buyers yesterday look foolish, at least for today and who knows how things are going to do after the jobs report.
The Dow began with a 40 point gain and then accelerated to the upside after the 10am release of the March trade deficit numbers, which came in much lower than expected and this will certainly add to the first-quarter G.D.P. in the next estimate. As this is being written, it is ahead by 123 points and breadth numbers are almost at a 3/1 positive ratio. The VIX is down by .79 to 13.70 so once again this is a wonderful example of how its upside enthusiasm on down days allows the major averages to continue to move higher, as the S&P is once again knocking on the door of another new all-time record high and yet the VIX is still above its various support levels down to 10. This shows that the purchase of these negative hedges in a very steady bullish market is obviously the wrong thing to do so far, until the upside market move changes, which so far it has not.
Bond yields are steady at yearly lows ahead of tomorrow’s jobs report on the lower ADP estimate, but on the other hand crude oil prices are higher on the fact that today’s jobless claims report was lower than expected and the E.U. lowering of interest rates should theoretically expand economic activity. So these are wonderful examples of how market experts use whatever works, so to speak, in terms of “explaining” why this or that item is going one way or the other.
The Euro is getting blasted to the downside on the lowering of rates and the statement accompanying it as mentioned above. But after all is said and done, all it is doing is just basically going back to where it was several days ago, close to the 1.300 level, so it is essentially much ado about nothing over the past week.
As far as tomorrow’s jobs report is concerned, I have always been of the belief that it is better to go into a major event on a downward path, as then the bar for success becomes lower. I would imagine that if the official number does not come in worse than the ADP estimate of 119,000 and last month’s miserable number of 88,000 is revised upward, the market could continue to move ahead. Anything less than this would be bad because the S&P will close today around record territory which then leaves it vulnerable to further downside probes.
The earnings scorecard is a little boring this week and finishes with Friday – DUK, ADP.
Economic reports will finish tomorrow with – April jobs report for which the current prediction is now for 145,000, March factory orders and April ISM Non-Manufacturing Survey, so this will be a dynamic day for reports, to say the least.
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 3.6% 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 15 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 2.5% 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}.