After Wednesday’s down day on the old “good news is bad news” syndrome due to the belief that the Fed is going to withdraw the full extent of its stimulus sooner rather than later, the market decided yesterday to go back to the “bad news is good news syndrome” because of the weaker reports that were released and more on those later. As a result, the Dow started out higher, then extended its gains to 96 points at the 2:20pm high before it pulled one of those classic last-hour meltdowns, as for instance at 3pm it was still 90 points higher and then decided that enough is enough on the upside, as those resistance points on the Dow in the 15,500 area and the S&P in the 1680’s are starting to make themselves felt.

As a result, the major averages went into a last-hour nosedive and by the time all was said and done, the Dow finally ended with only a 22 point advance, while the Nasdaq for a change held up better. Breadth numbers were solid at an 18/12 upside ratio and the VIX finally did what it is supposed to do, namely end lower on an up-day in the market. This action went against its recent pattern of moving higher when the major averages decline into the close as they did yesterday. It ended with a decline of .30 to 14.53.

And once again, that May pattern of utility stocks, telecom and consumer issues going lower exerted itself as well, with Dow components DIS, KO, MCD, T and VZ accounting for 40 points of losses just by themselves.
The 10-year Treasury note stayed around the same at 2.12% and the Euro reached a three-week high on the weaker report issues yesterday which at least for one day meant that the Fed is going to keep its stimulus programs going full force. Gold reached a two-week high for the same reason as it is following the Euro very closely lately. Crude oil reluctantly went higher by $.50 a barrel to $93.50 but it does seem to have a weak undertone to it lately, which is amazing considering that the summer driving season is upon us but at the same time the supply/demand fundamentals probably do not even justify prices at these levels.

As far as the “bad news is good news” syndrome that was at work, there were three economic reports that all came in below expectations, which supposedly showed for one day anyhow that the Fed was not going to take its foot off of the easing pedal as soon as last week’s late in the week and Tuesday’s panic selling indicated that they might. Weekly jobless claims rose by more than expected up to 354,000, a 10,000 increase from last week’s upwardly revised number and April pending home sales, although they reached their highest level since April 2010, still came in short of expectations. The latest revision of first-quarter G.D.P. showed that it rose by 2.4% as opposed to the initial estimate of 2.5%. So now we are going to be in one of those really sick phases of the market where investors have to root for these reports to come in below expectations for the reasons just mentioned as opposed to the stock market doing well because it is reflecting a better economy, and this is what we will have to deal with going forward.

Today we are seeing a very mixed picture to reports that were released, as for instance both April personal income and personal spending came in lower than estimated, and the latter actually declined for the first time in almost a year and already low inflation declined even further as the April PCE deflator index fell by more than predicted as well. On the other hand, the final May U. of Michigan Consumer Sentiment Survey rose to its highest level since July 2007 and the May Chicago Purchasing Managers’ Survey came in much higher than expectations as well. So now what does the Fed do because of today’s reports – do they keep their foot on the accelerator or begin to ease off?

The fact that the market is widely mixed today reflects that debate as the Dow has been all over the place, with an opening loss of 61 points eventually turning into a gain of as much as 68 at 11:15am before it eased off once again and is currently ahead by 4 points as this is being written. Breadth numbers are awful at a negative 1 to 2 downside ratio and the S&P is lower by 2 points while the Nasdaq is higher by 2 points while the Russell 2000 Index of small stocks is lower by a point, so this is about as diverse a picture as one can find on a particular day. The VIX is nominally higher with a .14 gain to 14.72, which is neither here nor there as some resistance to further advances seems to be building up over 15, which is probably still too high but as we all know, the buying of various VIX-related instruments is a function of those who think that the market is due for some kind of larger pullback than what has already been seen.

The Dow is being restrained by losses in the same types of stocks that have done poorly lately after very strong advances earlier in the year, namely defensive groups such as consumer and health care socks as JNJ, PFE, PG and UNH are accounting for 27 negative points by themselves while IBM is responsible for 18 upside points on its own, so go figure.

The bond market is raising yields once again on the assumption that the two better reports on Chicago manufacturing and Consumer Sentiment means that the day of reckoning for taking the Fed foot off of the breaks is going to come sooner rather than later as the yield on the 10-year Treasury note is back up to 2.17%. It has now undergone it worst monthly performance since December 2010.

The Euro is declining partly on this assumption and also on weaker German retail sales and the highest E.U. unemployment rate ever at 12.2%. Gold is following to the downside on the same assumptions, as it has been very volatile within its recent range as Monday’s Bi-Weekly Commodity report will show in more detail. Crude oil is declining as well as U.S. inventories rose to their highest level in 82 years once again and how many remember that event? As a result, it is back down to $93 a barrel which can be considered a moral victory in light of the fact that the oil companies will do their utmost to get prices higher at this time of the year.

The market will have now gone seven straight months to the upside for the first time since September 2009 and the S&P is up for the traditionally dreaded month of May by 3.6%. This is the best start to a year for the Dow since 1987 and for the S&P and Nasdaq it is the best since the early 1990’s.

As earnings season is basically over for the first-quarter, 70% of the S&P companies have beaten their earnings forecast, 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.
Next week will be highlighted by the May jobs report that will be released on Friday, and the current estimate is for a gain of 165,000, which would be the same as last month and we will discuss this more as the week moves ahead. Other reports will be: Monday – April construction spending, May ISM Manufacturing Survey, April vehicles sales; Tuesday – April trade deficit; Wednesday – oh, no – the ADP estimate for Friday’s jobs report, April factory orders, Fed Beige Book; Thursday – weekly jobless claims and then on Friday the big one.

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}.