After the first weekly decline in five weeks last week, the market started out yesterday as if it was going to put those Fed concerns about the timing and extent of eventual withdrawal of the current stimulus programs behind it. As a result, things literally exploded right out of the starting gate as the Dow reached an astounding 213 point gain by 10:30am, but there was a creepy undertone to things as bond yields rose to their highest levels in more than a year with the 10-year Treasury note now up to 2.17% because of those Fed withdrawal concerns. In addition, bond yields were hurt by a weak two-year auction, and isn’t it bizarre that when these yields across the curve were lower than they were yesterday, supposedly savvy bond investors were rushing in to buy them at what will now turn out to be losing merchandise until they get their principal back years from now, and at the same time when stocks were moving to record high levels.

From those intraday highs, which failed short of the intraday record highs from last Wednesday, May 22, which is the day that those contradictory statements from Chairman Bernanke and the release of the Fed minutes put the kibosh on the equity rally to those records, things started to deteriorate courtesy of those higher bond yields and this unfortunately could be a prelude to what might take place when an official announcement of this sort is in fact made. So in a sense just as the market has gotten tremendous upside benefits because of the Fed easing policies over the past few years, the piper might have to be paid on the downside when the time comes.

Just for the record, on May 22nd, the Dow reached 15,542, its best ever intraday level, and the best that it could do yesterday was 15, 521, which sets up a double-top resistance over 15,500. Same for the S&P, which reached 1687.10 last week as compared to 1674.21 yesterday, which also is going to be a new resistance level somewhere between these two levels. Ditto for the Russell 2000 Index of small stocks which reached 1008 last week as compared to 1005 yesterday, which is now also going to be a tough level to overcome as well.

Things started to come off of these best levels and by 2:40pm the Dow had fallen all the way back to the point at which it started the day with a gain of “only” 72 points and then clawed its way back to a closing advance of 106, which was actually a record high close at 15,409. But it was sort of a hollow victory as other parts of the market did very poorly as will be discussed later. Breadth numbers were at a positive 18/13 ratio but this was also off of its best early levels and the VIX, which was only lower by .92 when the Dow was on that 213 point high, had the nerve to end with a closing gain of .49 to 14.48 despite the fact that the Dow was higher by more than 100 points and all of the other major averages still showed decent gains by the close.

And for what it is worth, the Dow has now advanced for 20 straight Tuesdays, a record for that day of the week but still short of the 24 straight Wednesdays, which it achieved back in 1968 when it rose by 4.4% for the entire year compared to its 17% year-to-date advance so far in less than half a year. So in a sense, the 1968 record streak was more of an accomplishment than this one has been, although the current streak is not over yet.

The Euro took a downside beating right into its current support level of 1.285 on the perception of eventual Fed stimulus withdrawal. Gold followed the Euro lower, still refusing to break that $1,350 support level but crude oil could not resist the temptation to follow the stock market higher as at one point during the day it had the nerve to be ahead by almost $2 a barrel before finally ending with a $1 a barrel gain to around $95 when stocks came off of their morning highs, which just goes to show how these energy markets are maneuvered for reasons that have nothing to do with their own supply/demand fundamentals, especially now that it is in the interests of the oil companies to inflict as much pain as possible on the driving public during the summer driving season.

So what caused the huge upside explosion in the first place, which now looks like it has set up a strong double-top resistance level in the major averages that might keep things within a trading range for the near future? Apparently it was some comforting words from both the Bank of Japan and the E.C.B. to the effect that 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 CaseShiller 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 yesterday the “good news” was “good news” as opposed to last week when the good news is bad news syndrome took hold as stocks sold off because stronger reports such as new home sales and durable goods convinced investors that the beginning of the end of Fed stimulus withdrawal is at hand. 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.

Financials continued to do very well and energy stocks also added to their recent strong performance. Some technology stocks rose as well, with AMZN and GOOG rebounding from last week’s losses while old-timers MSFT and ORCL made nice gains. And the biggest disappointment had to be in the shares of the stock named after a fruit as after having done well last week when the overall market was lower, it started out higher by 6 points and then ended 3 points lower, a 9-point downside intraday reversal and this reversal took place even before the Dow and other major averages weakened from their best 10:30am levels as the early thinking must have been – gee, if this stock could do so well during a week when the broader market is down, imagine what it is going to do when the broader market is higher. Unfortunately it went back to its pattern of earlier in the year when things overall did better while this one stuck out on the downside by selling off. On the other hand, it is trying to do better today while the overall market is lousy, so when all is said and done it is still drifting harmlessly in its current trading range for the time being until some new impetus to get it out of this range emerges.

Continuing their awful showing for the month of May, the utility stocks and the various utility ETF’s continued to sell off on the perception that with higher interest rates in the bond market, the defensive steadiness of these high-paying issues is not going to be worth as much as they were when rates were at their recent all-time record low levels.

As May is drawing to a close, the market is still set to gain for the seventh straight month while the S&P was still ahead for the month by 3.9% as of yesterday with only three days to go.

The monthly gains for all of the major averages are going to be less after today’s poor showing, as now the market has decided to sell off on worries about when the Federal Reserve is going to start withdrawing some of its current stimulus programs. Of course, what changed between yesterday and today that the market originally went bonkers on the upside due to those better economic reports and the assurance from the B.O.J. and the E.C.B. as mentioned above? I guess the answer is that the major averages did weaken from the early upside euphoria and the Dow did end more than 100 points off of its best early levels, so some anxiety obviously began to creep in as yields rose to their highest levels in more than a year. And today’s action is sadly going to be a preview of what might happen when official announcements of Fed withdrawal are made.

The Dow started out with a large loss and continued drifting to its worst level of the day so far at a 180 point shellacking at 11am, from which area it has tried to dig in its heels and is currently lower by 160 as this is being written. Breadth numbers area complete disaster at a negative 1 to 5 ratio and the VIX is ahead by .76 to 15.24. The downside is being led by, you guessed it, utility and telecom shares on the interest rate front, and by that strong consumer staples group that has done so well this year with JNJ, MCD and PG all taking a breather from their record-setting performances in 2013.

The Dow started out with a large loss and continued drifting to its worst level of the day so far at a 180 point shellacking at 11am, from which area it has tried to dig in its heels and is currently lower by 160 as this is being written. Breadth numbers area complete disaster at a negative 1 to 5 ratio and the VIX is ahead by .76 to 15.24. The downside is being led by, you guessed it, utility and telecom shares on the interest rate front, and by that strong consumer staples group that has done so well this year with JNJ, MCD and PG all taking a breather from their record-setting performances in 2013.

Cyclical stocks, which have done poorly this year despite a recent better showing, are once again resuming their downside ways with resource and machinery stocks faring the worst. On the other hand, the shares of the stock named after a fruit are trying to make amends for yesterday’s awful downside reversal with a nominal gain, still within that harmless trading range, on comments from their C.E.O. that “several new game changers” (i.e. wearable computers) are being considered.

And in the biggest irony of all, the bond market is actually rallying a bit with yields on the 10-year maturity down to 2.14% after their largest one-day increase since October 2011 yesterday as some buyers are being attracted to the lower prices ahead of today’s five-year note auction. The Euro once again found support at the 1.285 level and is moving a bit higher despite German unemployment rising by more than four times as much as the experts had predicted as apparently the easing up on austerity policies favored by Germany to deal with the E.U. debt crisis without new spending programs is being viewed positively. Crude oil prices are getting sold off and they are once again just following the stock market either higher or lower, but perhaps this is the only good thing to come out of today’s equity debacle. Gold is also doing the opposite of what it did yesterday with a slight rally within the current trading range, once again holding support above $1,350 an ounce.

As earnings season is basically over for the first-quarter, with 495 S&P 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}.