That’s more like it – after having had the nerve to go lower on Thursday, the market decided on Friday to do what it has gotten so used to doing this year, namely find the path of least resistance to be to the upside. In the process, the Dow and S&P ended higher for the third straight week and for good measure set new all-time highs in the process, and why not?

The Dow was chopping around for the better part of the day between small gains and losses, in a range between up 32 to down 44 when at 3:40pm it was lower by 10, at which point for unknown reasons, it decided that it wanted to end the day higher and as a result it finished with a closing advance of 35 points, its best level of the day and a new all-time high close. Perhaps the main reason for getting the Dow positive was that the Nasdaq was in the plus column all day and for the second time this week we saw that old-time dynamic assert itself, namely that when the latter tends to do better, it has the effect of pulling up the former, as it was higher by 21 points when the Dow made that late reversal to end positively as just mentioned. For its troubles, the Nasdaq ended with a closing gain of 27.

Breadth numbers were also on the positive side at a 19/10 upside ratio and the VIX finally did what it is supposed to do, namely decline when the market goes higher, and its recent refusal to do that has allowed equities to keep marching to the upside, so this so far unsuccessful attempt to “protect the downside” has been a failure as every major index except the Nasdaq once again finished at its best level ever. The purchase of VIX calls and buying of all of these ETF’s based on the VIX has been an abject failure to date and perhaps we are going to see in a break from the traditional “sell in May and go away” dynamic that has worked for the past three years in the sense that the inevitable market pullback might be pushed back to later in the summer rather than in the late spring as it has usually taken place.

And for one of the rare times lately, after being higher earlier in the session as the Dow fluctuated between those gains and losses, the VIX and its loyal adherents finally gave it up very late and as a result it ended with a .57 point decline down to 12.56, still above its recent support level of 11.30 and its ultimate downside support area at 10.
Because of the selloff in energy and other commodity prices, some of the cyclical, material and energy stocks that had done so well lately sold off, as BA, CAT, CVX and XOM accounted for 23 negative Dow points despite the late push higher in the average itself.

The 10-year note yield continued to rise from its 2013 low last week as a result of the erroneous prediction from ADP that the jobs market would continue to stay depressed, as it pushed to a six-week high at 1.89%, up very quickly from that 1.63% pre-jobs report inspired low. Thursday’s weekly jobless claims, down to their lowest level since January 2008, has also given the perception that the jobs market is improving and this is helping bond yields to rise as well. The Euro declined down to 1.298 on the back of dollar strength as the Japanese yen fell to its lowest level against the greenback in more than four years.
This dollar strength contributed to a general decline in commodity prices, which we have been seeing lately and which began with the collapse of gold prices last month. On the other hand, other commodity prices are sort of going their own way, as for instance crude oil has been in that $90 to $97 range despite what appear to be bearish fundamentals with multi-year highs in inventories up against the fact that consumers have become hardened to the fact that prices inevitably move up just in time for the peak driving summer season. And Friday was a good example of this as crude oil prices were down by as much as $3 a barrel to $93.37 and then for no other reason that what I just described, they magically advanced to end at $95.87 for only a nominal loss on the day.

Of course, if stocks had ended lower, which they were for parts of the session, then market experts would have pointed to the comments from Philadelphia Fed President Charles Plosser who said on Thursday that he wants the Fed to start cutting back on the extent of its bond buying program as soon as the next Fed meeting in June. Of course, there is no way that this is going to happen because the central bank has said that they will maintain their current bond buying program at the $85 billion a month level and is “prepared to raise or lower the level of purchases as economic conditions evolve.” But they also said that they plan to keep their target interest rate near zero as long as unemployment remains above 6.5% and the inflation outlook does not exceed 2.5%. Mr. Plosser said that he expects unemployment to decline to 6.5% by 2014 and added that the Fed would be limited in its capability for additional stimulus and the unwinding of the current stimulus measures would be higher than expected.

After that strange very late Dow surge on Friday as mentioned above, things are starting out lower as the new week begins. The Dow is chopping around at lower levels with it worst decline of 65 points at 10am and is currently 30 points lower as this is being written. Breadth numbers are at a negative 12/17 ratio and despite the analysis from market experts that we are now seeing a shift into more economically sensitive cyclical areas, for the second straight day the worst Dow performers are just those stocks, with CAT, CVX and XOM down again, in addition to IBM.
The VIX is nominally higher by .02 to 12.61 as it awaits direction on larger market moves. Once again, bond yields continue to inch up with the 10-year Treasury note up to a seven-week high at 1.91% after April retail sales unexpectedly rose by 0.1% with so-called “core sales”, which eliminate automobiles, gasoline and building materials and which correspond most closely with the consumer spending component of G.D.P., up by 0.5% after a 0.1% gain in March. These gains, along with the better than expected April jobs report, are easing concerns about a sharper slowdown early in the second-quarter despite the various government sequestration cuts. Lower gasoline prices relative to their record-high levels in February and March are also allowing for gains in discretionary type spending as well.

The Euro is steady at its recent lower levels below 1.300 and crude oil prices are declining on a report that OPEC production rose to a five-month high, now down to under $95 a barrel. Gold is also sort of falling on its own accord as it remains in that $1,350 to $1,485 range, with the latter area starting to act as more formidable resistance to further advances.

This week mercifully brings the first-quarter earnings reporting period almost to a close with retailers and some technology companies bringing up the rear, so to speak with: tonight – DKS; Tuesday – A; Wednesday – CSCO, DE and M; Thursday – ADSK, AMAT, KSS, JWN, JCP and Dow component WMT.
Economic reports include – Tuesday: April import price index; Wednesday: May NY State Empire Manufacturing Index, April P.P.I., April industrial production and capacity utilization, May NAHB housing market index; Thursday: April C.P.I., weekly jobless claims, April housing starts and building permits, May Philadelphia Fed Manufacturing Survey; Friday: May preliminary U. of Michigan Consumer Sentiment Survey, April L.E.I.
As earnings season is winding down and for the first-quarter, with 450 S&P companies that have reported, 70% 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. Earnings are projected to gain 5.3%, which is now above the January estimate of 4.3% and well above the April 1st projection of only 1.5%, which is an obvious reason why stocks have done so well lately.

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 5.3% in the first-quarter of 2013. The S&P trades at 14.5 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}.