After yesterday’s lower session, things are worsening today as well, as the market did not even have a chance to at least rally early before undergoing the latest pattern, which is to weaken as the day moves along. The Dow began with a loss of around 40 points right off of the opening bell and has proceeded to exhale more than inhale as the session is moving along, with a steady chop lower in a classic down-staircase pattern, meaning that each successive high and low are getting worse up to now. As a result, the Dow is hovering just above its lowest level which was a 199 point loss at 12:55pm and is currently 174 lower as this is being written.

In another day dominated by the neurotic reaction of traders to every perception of what the Fed is or is not going to do in terms of the current level of stimulus, yesterday the market turned a gain of as much as 50 Dow points at10:30am into a decline of 150 at the worst level of the day at 2:15pm. This meant that there was an intraday downside reversal of 200 Dow points. From this low of the day the Dow tried to mount a recovery and by 3:45pm it had the nerve to be lower by “only” 27 points as it tried to extend its consecutive Tuesday record number of advances to 21, but alas, this was not to be in the current anxiety over the next course of future Fed policy, and as a result that late comeback attempt fizzled out as the Dow sagged in the last 15 minutes to finally end with a closing decline of 76. So let us all say goodbye to that streak of 20 consecutive higher Tuesdays.

Breadth numbers were weak at a negative 11/19 ratio and the VIX actually cooled off by the end of the session and finished with a nominal .01 decline at16.27. Bond yields moved up a bit to 2.14% for the 10-year Treasury note while the Euro and crude oil made nominal moves.

And ironically those stocks that have been shunned lately as investors have ostensibly moved into more cyclical issues, actually did the best at least for one day, as Dow components T, VZ and MCD all managed to end with gains. Whether this trend back to the early winners of the year continues is debatable of course. The Nasdaq really did not stand much of a chance as the majority of high priced leaders sold off rather sharply, ending any hope for the overall market to gain support from that group.

So now the question becomes – what happened to cause that horrible downside reversal as mentioned above. And the answer is that at 1:15pm, with the Dow down “only” 25 points on the day, still 75 off of the best early level, the text of comments made by the Kansas City Fed President were released, as apparently this person was too sick to deliver the remarks in person. And they read as follows – “In light of improving economic conditions, I support slowing the pace of asset purchases as an appropriate next step for monetary policy.” And to these remarks were added, “History suggests that waiting too long to acknowledge the economy’s progress and prepare markets for more normal policy settings carries no less risk than tightening too soon.”

And voila, that is all that a nervous market needed to hear, as the near-term trend has obviously turned to the downside after two straight negative weeks. Of course, this downturn has come after various market experts were falling all over each other to raise end of year price targets at the market highs two weeks ago, and what else is new?

Breadth numbers are really awful at a negative 1 to 5 ratio and the VIX is once again having an upside field day with a gain of 1.11 to 17.38. Bond yields are actually declining on the ADP estimate for Friday’s jobs report which predicted 135,000 as opposed to the official estimate of 165,000 and let us remember how far off they were last month when they were only 46,000 too low in their prediction, and the official number for April will be revised on Friday as well.

So today we are going back to the old bad news is bad news syndrome, at least for equities, but bonds are resuming at least for one day their traditional role as an ostensible “safe haven”, with the yield on the 10-year note down to 2.08%. Of course, this pattern goes against what we have been seeing lately, because when stocks have declined, bond yields have risen on the Fed taking away the stimulus sooner rather than later scenario.

And when bond yields have fallen lately, stocks have rallied on the Fed keeping the stimulus around longer way of thinking, so today’s action in both stocks and bonds is a perfect example of market experts “explaining” things in any manner to justify what is going on. The Euro is rising a bit, up to almost 1.310 on the weaker ADP estimate, which now means that the Fed might keep the stimulus in effect longer, but isn’t that supposed to help stocks? And so it goes.

There were two other economic reports released today that experts are having trouble with ,as they both came out around their estimates, as April factory orders rose by 1% while the May ISM Manufacturing Survey was at 53.7, so put any spin you want to on these items.

Crude oil is rallying today as the summer driving season is in full force and what else is new and the participants in this market are obviously not going to let it go below $90 and isn’t crude oil supposed to follow the stock market lower, but today is one of those days when experts will just find any explanation to justify what the price action is revealing.

Also not helping was another decline in the Japanese stock market, which had risen by 50% this year before coming back down to earth, as it declined by another 3.8% last night to a two-month low. In addition, there were weak economic reports out of Europe, as business activity there declined in May, and is this supposed to be some sort of surprise?

Now everyone has to wait until the 2pm release of the Fed Beige Book which will summarize economic conditions in various parts of the country and let us hope that the market’s already severe decline has already discounted any negative implications out of what they have to say. 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.

This 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: later today – 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}.