Let us go over what has transpired since the last edition of the daily market notes appeared last Thursday.
On Thursday, after having made consecutive records for the first three days of the week, the market decided to take a bit of a breather as the Dow reached its worst level of the day when the Philadelphia Fed May Manufacturing Survey showed its first decline in three months. In addition, weekly jobless claims rose by more than expected, an advance of 32,000 to 360,000. Then to add more anxiety to the perception of a better economic recovery, April housing starts declined by a large 16.5%, the most since February 2011 although building permits, an indicator of future activity, rose by a large 14.3% which was the most in five years.
From those lows, the market did what it has done all year, namely use any excuse after a little decline to rally and sure enough the Dow decided to turn that early 40 point loss into a gain of 27, which turned out to be the high of the day at 11:15am, where it sort of remained until 2:45pm, when, horror of horrors, things took an abrupt turn to the downside and as a result, the selling pressure intensified and the Dow ended with a 42 point closing loss after having been as low as 60 points to the downside.
Breadth numbers finished at a negative 12/18 ratio and the VIX, which has really allowed the market to keep moving higher as it refuses to decline as it should, something I have pointed out so many times this year, rose by .26 to 13.07. And will miracles never cease, as the best Dow performer was none other than beaten-down CSCO, which for a change actually did the opposite of what it has done these many years, namely rally after a good earnings report when it usually sells off after its C.E.O. talks down its prospects going forward after what is usually a good earnings report, but this time the numbers were too good for even him to do his usual damage. It actually contributed 20 positive points to the Dow and it inspired other technology stocks that deal in networking and data storage to do well also, and IBM advanced to the tune of contributing 10 positive Dow points. On the other hand, another Dow component that has attained new all-time highs this year, WMT, sold off because the bar was set too high for this one to keep going any further for the time being and as a result, it was responsible for 10 lower Dow points just by itself.
The yield on the 10-year Treasury note, which had been rising because of the perception of a better economic recovery, came back down to 1.87%, still within the recent range, on the perception of a weaker economy, and the Euro remained sort of unchanged around the 1.288 area. Crude oil continued to rise and ended with a $1 gain per barrel up to $95 after having been as low as $93 on the perception that the Fed will continue to provide stimulus even after two Fed governors said this week that they believe in starting to curtail these programs.
In fact, the reason that market experts gave for the late downside acceleration were comments from the San Francisco Fed President that the central bank could begin easing up on the monetary stimulus programs this summer and completely end its bond buying late this year. In the process, he omitted for the first time in months his view that these Fed asset purchases will probably be needed well into the second half of the year.
But in a sense the two main themes of the day did not jibe, so to speak, because while this Fed official said that he believes the stimulus should come to an end sooner rather than later, the economic reports released on this day were all weaker than expected and in addition there is no sign of inflation as the April C.P.I. report showed a decline for the second month in a row and this is the first time that this has happened since the all asset prices were collapsing late in 2008.
After the market had the nerve to decline for a day, things righted themselves to the upside on Friday, as after the weaker economic reports from the day before, on this day everything was coming up roses, so to speak, as the U. of Michigan preliminary May Consumer Sentiment Index rose to its highest level since July 2007 and the April L.E.I. showed its best gain in five years with a 0.6% advance.
And this is all that a market that had the nerve to decline for one day needed to see as things opened higher and never looked back, as the Dow opened around 50 points higher and sort of remained there until 2pm, when it decided to fool those who thought that it would do the same thing for two days in a row by selling off late once again, and this is one of the oldest tricks in the books, namely to outwit those who think that the pattern of the previous day is going to manifest itself once again on the next day. And this resulted in a steady but strong upside acceleration as the Dow kept going and going from that point into the close, along with the other major averages as well, and ended with an excellent 121 point closing gain and the Nasdaq ended at its highest level since October 2000 when it was on the way down from the unsustainable 5000 level reached in March of that year. And in addition to the financials, which have really done well lately, the industrial cyclical stocks did better on the basis of the two economic reports that came in better than expected, as companies like BA, CAT for a change, UTX, XOM and IBM, which always seems to make either outsize gains or losses in the overall direction of the market, led the upside charge.
Breadth numbers were very strong at a 22/8 upside ratio and the VIX did end lower with a .62 point decline down to 12.45. And another word about how this indicator is allowing for these almost unrelenting gains to new all-time record highs literally day after day, as for the week, it declined by only .14 points while the Dow advanced by 236 and the S&P did even better with a 34 point gain. So instead of declining by more than 2 full points as it should have, it only went lower by a small nominal amount and this is the primary reason why stocks can continue to move even higher as I have pointed out so many times, and this is due to the so-far vain attempt by investors to “protect” their portfolios on the downside through the purchase of VIX calls and various ETF instruments which do nothing for them, and today is an even better example of this as will be pointed out shortly.
As a result of this strong performance, the S&P gained for the 17th time in the past 21 sessions and there has not been a back-to-back two day decline since April 17-18th, which is astounding. And in a refutation of the old “sell in May and go away” market adage, the S&P has now gained 4.4% so far this month, compared to a 1.8% advance in the traditionally more friendly month of April.
And just as bond yields declined on Thursday because of the weaker economic reports, they bounced right back up on Friday due to the stronger economic reports, which basically proves that bond traders are perhaps the most schizophrenic group of all, as they push yields around with basically no conviction, just reacting to each day’s events as if what they did the day before has no relevance at all. Crude oil prices naturally had another upside field day as now these economic reports showed a better economy, which presto, translates into higher energy prices, as it gained up to $96 a barrel just in time for the summer driving season and in the meantime gasoline jumped to a five-week high in order for the oil companies to bring about the most hurt to consumers ahead of the summer driving season and more on this in today’s bi-weekly commodity report. Gold prices collapsed right into support at the lows from last month in the $1,350 and below area from which they do not seem to want to go lower for the time being, and also more on this in the commodity report as well.
The expiration of the monthly May option series saw a huge number of SPY puts expire worthless, to the tune of 5.2 million against only 24,000 that had value, a 99.5% ratio in favor of those who bought these puts for ostensible “downside protection” having nothing to show for their troubles, but due to the unrelenting move higher, 1.8 million calls ended with value as opposed to only 262,000 without value, which is the best ratio in this regard in a long time, but overall, 74% of all SPY options expired worthless and the differentials between puts and calls were about the widest ever seen, as how often does a market move so steadily and regularly to the upside like this.
After last week’s move for the fourth-straight week to new all-time highs in all of the major averages except the Nasdaq, things started out a little lower, as the Dow declined to its worst level of the day so far with a 40 point loss shortly after the opening, as economic reports this week are on the light side and the first-quarter earnings season is just about over after this week’s announcements.
But since there seems to be some sort of law against the market going lower, things immediately turned around to the upside with the Dow reaching its best level of the session at a 37 point gain right after 12 noon. It has since eased off a bit and is ahead by 14 points as this is being written. The Dallas Fed President said that the odds favor scaling back central bank stimulus purchases and he was actually in favor of reducing them at the last F.O.M.C. meeting. This of course is supposed to be bearish, as witness what happened last Thursday as described above, but the market seems to have this tremendous underpinning as it refuses to decline by much at all, so market experts “explained” today’s better action on gains in energy stocks, and here we go again with crude oil prices rising at the time they are supposed to in order to punish consumers during the summer driving season which is virtually upon as, and financial stocks once again continue their leadership role. And those cyclicals are doing better for the second day, with Dow components CAT, 3M and UTX all showing to advantage as the former appears to be rising rising from its long slumber, while the latter two have done very well this year.
On the back of a stronger yen that is showing its best gains against the dollar in three weeks, and gold has fooled its bearish detractors by rising right from support in the $1,350 area as there are now the largest number of bearish positions against gold and what else is new, and more on this in today’s commodity report. Crude oil naturally is going higher just in time for summer as it is up to $97 a barrel, which gets it closer to the level where it can start to do some harm to consumers.
Economic reports are on the light side this week with: Wednesday – April existing home sales and the Fed events as already mentioned; Thursday – April new home sales; Friday – April durable goods orders.
Earnings season for the first-quarter finishes with retailers and a few interesting technology companies as is always the case: Tuesday – DKS, BBY, AZO, TJX, ADI, NTAP and Dow component HD; Wednesday – SPLS, LOW, TGT, PETS and Dow component HPQ; Thursday – DLTR, GPS, RST, WMS, RL, and CRM; Friday – ANF and FL. As earnings season is winding down and for the first-quarter, with 465 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 4.8%, 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 4.8% 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}.