After all of the dramatic overnight events following the contradictory Fed statements about the timing and extent of their potential exit from the QE3 easing programs, things opened on a decidedly weak note yesterday. And these overnight events included negative news that China’s manufacturing contracted in May for the first time in seven months as their Purchasing Managers’ Index fell to 49.6 compared to the 50.4 reading last month and anything above 50 shows expansion while readings below it show contraction. Then we got the Japanese stock market plunging by almost 7% in the largest decline since the 2011 tsunami and nuclear disaster and Japanese bond yields rose to 1% for the first time in a year.

As a result, the Dow started out the session with a 127 point decline by 10am, then moved up a bit when Europe closed to be 80 points lower, then actually had the nerve to be ahead by 24 points at 12noon, tuned negative once again before trying for one last time to extend its gains and was up by 41 at its best level of the day at 2:45pm. But due to the fact that it was flying solo in the sense that the other major averages were not participating and breadth numbers were very negative, a case of the troops not following the generals, the Dow finally gave it up toward the end of the session to close with a 12 point ending decline. Both the S&P and Nasdaq could not get their upside acts together and ended lower after not even really trying, as with the exception of AAPL which is drifting in this sort of harmless neutral range as it tantalizes its supporters 37% below its all-time highs, the other high-priced leaders are temporarily on vacation, so to speak.

The concept of flying solo was valid because two components alone, namely HPQ after its best performance in years and BA, which has been on fire all year, were carrying the day all by themselves, as the former contributed 27 positive Dow points alone and the latter added 14. But these two could not overcome the weak sentiment that pervaded the overall market due to the negative carryover vibes from how the Fed has now messed up the market with their completely contradictory statements.

Breadth numbers were at a negative 12/17 ratio, and believe it or not, these were better than what they had been for the bulk of the day due to some late buying in smaller stocks as the Russell 2000 Index quietly ended higher, and what was that about as it is the worst performing index so far today.

The yields on Treasury securities sort of stayed the same, with the 10-year now fixed at the nice round number of 2%, having moved higher to where it is now on the potential for the Fed taking its foot off of the breaks. And how about gold, which at least for a day resumed its “safe-haven” status, as despite all of the bearish sentiment about the precious metal, it has still not broken below that $1,350 support level. Same for the Euro, which rose strongly on the back of a suddenly resurgent Japanese yen, which gained by the most in three months against the dollar on what I could never figure out, as it is considered a “flight to safety” in what has been the worst performing economy and stock market for 25 years already. Perhaps that move to those dynamic 1% yields is what is causing the love affair.

And crude oil declined for most of the day and was lower by as much as $2 a barrel down to almost $92, but remember that with the summer driving season on hand, this lower price was really not tolerable by the oil industry and by some “miracle” it rallied back to end just about unchanged at $94.20.

Until proven otherwise, the S&P has now gone 129 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 that streak of not declining for two days in a row, in force since April 17-18th, fell by the wayside as the thinking among investors has now turned more two-sided after the Fed did its number on the market.

Today will now be the third lower day in a row, heaven forbid, despite a better than expected April durable goods report, which is a great example of the “good news is bad news “syndrome, as the thinking now is that if things are getting better, then the Fed will have an excuse to remove some of the stimulus sooner rather than later. And heaven forbid, if in fact the averages continue on the downside, it will be the first three consecutive day decline of the year, which is sort of amazing it and of itself that something of this sort had not taken place sooner.

The Dow began with a decline of as much as 95 points at its 10:30am low, and this once again implies weak selling at the time of the European close, and this is exactly the time that it made its low yesterday as well. From those lows, it has battled its way back to a current decline of only 10, but once again the upside is being distorted by a large gain in one particular component, and today it is the shares of PG which is accounting for 25 upside points just by itself and WMT is adding another 7, so here you have two stocks lessening the negative impact by 32.

This over performance of the Dow relative to the rest of the market can be seen in the fact that breadth numbers are awful at a negative 11/18 downside relationship and the VIX is now higher for the fifth straight day, the first such occurrence of the year, with a gain of .32 to 14.39, and it was even higher on the first two up-days of the week before the Fed ruined the bullish party that had existed until mid-day Wednesday.
May 24, 2013.

Bond yields seem to be now fixated at the 2% level for the 10-year for reasons mentioned earlier this week, and the Euro is drifting slightly lower, as is gold, which continues to defy its large chorus of negative participants by refusing so far to break below that $1,350 support level. Crude oil is sort of atoning for yesterday’s strange late move higher and is lower by around $.50 to $93.50 but if the market continues to improve, then it will feel the need to move higher as well.

As earnings season is winding down and for the first-quarter, with 485 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 5%, 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% in the first-quarter of 2013.

The S&P trades at 15 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}.