As has been somewhat typical for this record-breaking year, the Dow has had some difficulties on Mondays for whatever reason, rising less than half the time, and yesterday followed that pattern. On the other hand, Tuesdays have been something else as today’s further upside will now be the 18th straight up-session on the second day of the week and more on that later.

The Dow, at least, could not really get it together yesterday as it stayed negative for the entire session, fluctuating between losses of 65 points at 10am at the worst level of the day and its high of 14 negative points at 12 noon, before finally ending with a closing decline of 27. On the other hand, both the S&P and Nasdaq managed to eke out small closing advances and for the S&P it was another new all-time closing high, modest as it was up to 1633.77. And as is always the case when the Dow diverges from the other indexes, it is a few components that sort of do their own thing, and yesterday was no exception, with IBM, CAT and CVX accounting for 37 points of Dow losses by themselves.

Breadth numbers were at a negative 12/17 ratio despite the fact that the S&P and Nasdaq ended higher, but on the other hand the Russell 2000 Index had the nerve to break its current hot streak of one record after the other. The VIX acted as it should have, with a nominal decline of .04 to 12.55, right into somewhat of a near-term support level and much more on this later.

The yield on the 10-year Treasury note continued its recent pattern of gains after reaching its low level for the year on the incorrect assumption that was generated by the ADP way-off low estimate for the April jobs report, which continued their long-standing record of being incorrect more than correct in their estimates. The yield reached a seven-week high at 1.91% on the new assumption that things must be getting better if the stock market is racing to new record highs on almost a daily basis. This assumption was furthered by a better than expected April retail sales report which 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, have eased 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 for the months of February and March are also allowing for gains in discretionary type spending as well.

The Euro sort of hung around below 1.300 at 1.297 and crude oil did everyone a favor by losing a $1 a barrel down to $95, from which level it only reluctantly goes lower with one eye on the upcoming summer driving season, in order to cause the most pain for gasoline consumers. Gold, on the other hand, sold off sharply but it is still within that new lower trading range between $1,350 and strong resistance at $1,485 and it appears less likely that the lower end of this range will be tested despite calls throughout the land for a full-fledged bearish market.

And for good measure, the central bank of Israel joined its counterparts in other areas of the world, namely the U.S., E.U., England and Japan, in lowering rates to record low levels, as they moved down to 1.5%.
After yesterday’s mixed session, for the 18th straight Tuesday things are rocking to the upside, with new all-time highs once again in every major average except for the Nasdaq. The Dow started out of the opening gate with a gain and kept going straight up until it reached its best level of the day so far with a 100 point advance at 12:20pm and is currently ahead by 88 as this is being written. It has now advanced for the 18th straight time on a Tuesday, still short of the 24 straight Wednesday advances from I do not know the year, but that year will manifest itself if the current Tuesday streak starts getting closer to the Wednesday record streak.

Let’s see now – why don’t we add to the records and streaks, and let us begin with the fact that the S&P has now achieved a new all-time high for the eighth time in the last nine days, and other averages that are at new highs have just about the same track record. And if one is looking for “explanations” for today’s strong market, l still maintain that the best one is the refusal of the VIX to act in a normal way relative to these record equity gains day after day, and today has to be one of its most bizarre patterns of all, as for instance when the market was pushing to its best level of a 100 point gain at 12:20pm the VIX had the nerve to actually keep pushing higher at the same time! It actually reached a .66 point advance at the same time that those highs were reached, and if one wants to be optimistic about stocks even from current levels, this is the best thing that can happen in the sense that the further that it goes from support areas, the more room the market has to go on the upside, and I had mentioned earlier that the 12.50 area is a support level, but I did not think that the VIX would rise from there on such a strong day in equities. And it is not as if the May VIX options are set to expire, because they do have another week to trade, so we can eliminate any funny business that sometimes occurs with these expiration days. On the other hand, it is easing off a bit from those highs of the day as time is moving along, and is up by .26 to 12.81 as this is being written, still very bizarre relative to that 88 point Dow gain at the present time.

As for other reasons why things continue to push ahead, for whatever it is worth, the NFIB Small Business Optimism Index rose to its highest level since last December, and April import prices declined by about what was expected due to the drop in oil import prices since their earlier in the year highs. There was a report from a large investment house that the Chinese economy will “slow” this year to growth of only 7.6% from 7.8% and this explains the losses in such issues as CAT, which gets tied up with the economic fortunes of that country, and also of various and sundry Chinese issues such as BIDU.

Breadth numbers are at a strong 2 to 1 positive ratio and bond yields continue to rise, with the 10-year Treasury note up to 1.94% because stronger stocks mean a better economy, according to the thinking of bond market participants and also to some leftover beliefs from Philadelphia Fed President Plosser’s comments last week that the central bank should start to cut back on its QE program of $85 billion a month as early as the June meeting, which of course is not going to happen, but once a mindset gets underway, all sort of rationalizations are proposed to justify it, in this case the argument for higher bond yields. Crude oil is reluctantly going lower ahead of a forecasted gain in inventories for the fourth straight week in tomorrow’s report and gold cannot catch a break as it drifts nominally lower. Copper is getting sold off on the weaker economic predictions for China as mentioned above. The Euro is drifting lower again, down to 1.294 on a German investor confidence report that came in lower than expected and on the perception of a better U.S. economy.
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: Wednesday – CSCO, DE and M; Thursday – ADSK, AMAT, KSS, JWN, JCP and Dow component WMT.

Economic reports include – 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}.