For the second day in a row on Friday the major averages traded at their worst levels of the session just at the time that the European markets were closing around 10:30am here and then proceeded to do better as the day moved ahead. For instance, the Dow fell to a 95 point loss at that time and then proceeded to chop irregularly higher and actually stuck its head into positive territory a few times in the early afternoon before falling to a 28 point loss with 10 minutes to go.

From this negative reading, it decided to go higher and as a result, it finally ended the pre-holiday session with a closing gain of 8 points while the S&P, Nasdaq and most other measures finished nominally lower. This was almost identical to what happened the day before when it turned a 10:30am decline of 127 into a closing loss of only 12 while breadth numbers remained negative and other measures also ended in the nominal minus column. And if this type of market action is not representative of the old buying on the dip mentality, then I do not know what is. In fact the only day last week when we did not see this dynamic at work was on Wednesday, when the conflicting Fed comments had the complete opposite effect, as they turned what had been a 155 point intraday Dow high into an 80 point closing decline.

And as is the usual case when the Dow goes solo against the trend of the broader market, it is invariably a small number of components that either do the heavy lifting to the upside or to the downside, as the case may be. And Friday was no exception as component PG accounted for 25 upside points just by itself after a strong gain due to a management change, while WMT contributed 8 upside points after rebounding from an earnings-related selloff earlier in the week, heaven forbid. Breadth numbers were at a negative 13/16 ratio and the VIX, which had been positive all day, decided to finally give it up at the end and finished with a nominal loss of .08 down to 13.99. But once again for the week, it rose by much more than it should have relative to the Dow’s decline, which was 51 points, while the VIX advanced by 1.54.

The 10-year yield on Treasury notes hung around at 2.01% and the Euro was also quiet as it ended at 1.293. Crude oil declined a bit down to $93.92 but it is obviously waiting for the next excuse to go higher now that the summer driving season is upon us.

There was one economic report that came in better than expected, as April durable goods rose by more than forecast, but then investors used the old “good news is bad news” syndrome to keep the market mainly negative, although it did rally back from its worst levels as mentioned above. Nevertheless, we finally had the first down-week after four straight up ones and for that we can thank the Fed for its contradictory statements that investors were exposed to both in the release of the latest minutes and the Congressional testimony from Chairman Bernanke last Wednesday.

Sure enough, that refusal of the VIX to decline by what it should has allowed for another upside moonshot today, as all of the negative vibes put out by the hawkish contingent at the Fed, that worst in seven months Chinese manufacturing slowdown and the largest collapse in the Japanese stock market in over two years have been conveniently forgotten, as things took off right out of the starting gate as the Dow reached its best level of the session at 10:30am with a strong gain of 218 points, from which it has cooled off go be ahead by 130 as this is being written, which is the “worst” level of the day.

For those who watch such things, the various stock index futures were higher in last night’s session, apparently on the re-assurance from both the Bank of Japan and the E.C.B. that their monetary accommodation will remain in place, unlike its partner at the U.S. Federal Reserve which has indicated that it is ready to take some of the punch bowl away. In addition, there were some stronger than expected economic reports as the March Case-Shiller Home Price Index rose by the largest amount in more than seven years with a gain of 1.1% and May Consumer Confidence increased by the most in more than five years. So today the “good news” was “good news” as opposed to last week when the good news is bad news syndrome took hold as mentioned earlier. And in a classic case of being behind the market, Moody’s changed its outlook for the U.S. banking system to stable after having had it at negative since 2008, now saying that the country’s economy poses less of a threat.

Breadth numbers are at a better than 2 to 1 upside ratio and once again the VIX is refusing to go lower as the Dow is still in triple-digit advance territory, while the VIX is only lower by .08 down to 13.91 which is the same that it declined on Friday when the Dow was higher by only 8 points as mentioned above, and this is why the market can theoretically keep moving higher even from these extended levels.

Meantime the yield on the 10-year Treasury security is leaping ahead to the upside as it is convinced that the Fed will be pulling back on stimulus in the sooner rather than later time frame, and it is now at 2.12%. The Euro is declining for the same reason, back down again to support in the 1.285 area on the perception of a better U.S. economy. Gold is following the Euro lower but crude oil is having an upside field day on the fact that the economic reports today were better than expected despite demand being down and supplies that are higher, but never mind as I had mentioned that oil traders and oil companies will use any excuse to push prices higher at this time of the year in order to hurt the consuming public as much as possible.

As earnings season is basically over for the first-quarter, with 492 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.

Economic reports this week will be the following – Thursday: revision of first-quarter G.D.P., weekly jobless claims, April pending home sales; Friday: April personal income and spending, May Chicago Purchasing Mangers’ Survey, U. of Michigan final May Consumer Sentiment Survey, May NAPM Milwaukee Index.
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}.