After setting new all-time highs in most of the major averages on Friday, the market did what it usually does on a Monday, namely not perform as well as it does on other days of the week, particularly on Tuesdays, where the Dow has risen for a record 18 straight weeks on that day.

It began with a 40 point loss which then turned into a 37 point gain at what turned out to be the best level of the session at 12 noon. From that level, it sort of chopped around with a downward bias and finally turned negative at 1:15pm and then slid down to a final closing loss of 19 points. On the other hand, overall breadth numbers were at a 17/13 positive ratio and as is the usual case when the Dow is somewhat out of synch with the overall market, there are a few components that do their own thing opposite to the general trend. And yesterday was no exception as TRV, PG and IBM accounted for 20 points of Dow losses, which was basically the entire loss.

And once again the VIX refuses to go lower on up-days to the extent that it should and on any hint of a down-day it goes up by more than it should, which basically assures that stocks can continue to go even higher from where they are now. With that nominal loss of 19 Dow points, it rose by .57 up to 13.02, and there does seem to be a near-term strong support at around the 12.50 level, from which it currently refuses to go lower and this is another dynamic that is allowing for higher stocks as well.

In addition to the Dow, the S&P and Nasdaq also ended nominally lower but both the Russell 2000 Index of small stocks and the mid-cap indexes finished positively, and the large number of issues that they account for was what was responsible for the fact that overall breadth numbers were on the positive side as mentioned above.
The yield on the 10-year Treasury note maintained itself at higher levels on the perception of a better economy in an overall sense in addition to the murmurings of some sort of removal of QE stimulus sometime this year as various Fed officials have been yapping about this in recent days. The Euro was unchanged but crude oil could not allow itself to go lower with the start of the summer driving season upon us with the upcoming Memorial Day weekend at hand. It got as high as $96.71 which gets it close to the level at which it can start to do some damage to consumer spending and apparently the reason for the strength is that gasoline prices have moved to a give-week high on the usual refinery downtime for repairs and all of the other excuses that the oil companies use all the time when they want to push prices higher. And gold, by some miracle was able to pick itself off of what now appears to be a double-bottom support level around the $1,350 area to where it declined earlier in the day, and made a decent bounce back, but the sentiment is still negative here as it would appear that any sort of decent rallies are going to be sold into by those who bought at the higher levels and would be looking to call it a day if they can get out at even.

The market was inspired to get to those highs on the fact that there was a large amount of merger and other deal making activity yesterday morning and no less than $10 billion of such activity was announced. But this did not result in a sustainable pattern for the entire session. And as has been a recent trend lately, some of the cyclical material and energy stocks did well, with CAT finally showing some life after the beating it has taken this year while 3M continues to trade at the higher levels.

What apparently knocked the market off of the highs were further comments from Fed officials about the time to take away some of the record $85 billion monthly stimulus mortgage-backed and Treasury bond purchases that have been in effect since last September. Yesterday both the Chicago and Dallas Fed Presidents said that because of labor market improvements, the central bank would be justified in reducing its stimulus programs. As an example, monthly payroll growth has averaged 208,000 in the last six months, compared with 141,000 in the six months prior to the QE3 launch in September. At the same time, the unemployment rate has declined to 7.5% from 8.1% in August. As a result, policy hawks have jumped on this improvement to say that some tapering off should begin.

And if one wants to see how overbought the market has become, 38% of stocks in the S&P have reached new 52-week highs in the past week, which is the most since at least 1990. In addition, the market has now gone 127 sessions without a 5% decline, and the last one of this magnitude or greater was the 7.7% setback from last September 14th to November15th and this has been the longest such streak since there were 173 such days that ended on February 20, 2007. But with the VIX refusing to go lower as I have described many times, the market certainly has much more room to advance and today is another example of why its refusal to decline as it should keeps allowing for further upside. As a result of these dynamics, the S&P has gained for the 18th time in the past 22 sessions counting today 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 4.5% so far this month, compared to a 1.8% advance in the traditionally more friendly month of April.

If the Dow ends higher for the 19th consecutive Tuesday today, we can ask – what did you expect, as it jumped out of the starting gate with a 65 point early advance, which then had the nerve to turn into a 10 point loss at 11am, from which point it did not want to disappoint its legion of loyal Tuesday bulls, and as a result it bounced right back to the upside and is currently ahead by 70 as this is being written.

Breadth numbers are at a positive 17/12.5 ratio and today is a wonderful example of why the market can go even higher, as despite this good advance, the VIX has the nerve to be just about unchanged at 13.02, and even rose to a .42 gain on that brief Dow decline into negative territory by a measly 10 points. This strange behavior could be a function of the expiration tonight and the settlement tomorrow of the May option series, but assuming that it ends at around the 13 level, there will be 2.5 million calls that will expire worthless, and talk about a waste of money by the bearish contingent looking for a supposed “downside protection” scenario.

In somewhat of a contrast to other recent sessions, today we had a Fed official arguing for keeping the QE3 stimulus programs intact, as St. Louis President James Bullard said that the bond buying should continue in order to support an economy that is growing by less than expected. Of course, all of these comments are a prelude to tomorrow’s release of the Fed minutes from their last meeting and also from Chairman Bernanke’s Congressional testimony.

The Dow is being helped by a strong gain to new highs in the shares of HD, and from gains in IBM and CVX, which are accounting for 40 Dow points just by themselves. The Nasdaq is lagging due to losses in AAPL after a nice gain yesterday although it did have the nerve to go briefly positive as its top executives testify in front of Congress about their tax payment policies. In addition, recently strong GOOG and PCLN are taking the day off after their outstanding performances as of late.

The Treasury market is higher today on the Bullard comments with the 10-year yield down to 1.93% and crude oil actually has the nerve to be a little lower on some early dollar strength, which disappeared after the Bullard low interest rate remarks and gold is lower after yesterday’s huge dramatic upside reversal, as it finds any and all excuses not to do well, and today the excuse is that there will be scale backs of Fed purchases, which is the exact opposite of what Bullard’s comments were and these comments are being used at the same time by stocks to advance, so here is another example of market experts “explaining” what is going on using any rationale for justifying the market action that takes place in various asset classes.

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: tonight – NTAP; 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 475 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 48% 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}.