After yesterday’s downside disaster, the various stock index futures did their best to recover in the overnight session as for instance the S&P contract reached a gain of as much as 8.75 points at 8am and since they closed higher than fair value, this type of relationship would have led to a very solid opening had it stayed that way into the 9:30am start of trading. But just at that time, apparently comments from another head of a central bank did things in, similar to how Bernanke’s comments here on May 22nd have ended the bull market for the time being. This time the “honor” went to E.C.B. President Draghi who said that European policy makers “left additional stimulus measure on the shelf”, because it was his belief that “the region’s (Europe) economy should revive this year and return to growth”. So this is a classic example now of the good news being bad news, as I mentioned previously, when the market wants to go lower, which appears to be the case at the present time, it will use any sort of convoluted excuse to accomplish just that.

So instead of a strong opening, we got a mixed to higher one, as the Dow managed to reach its best level of the day with a 41 point again by 10am, which just so happened to take it to 15,001, the same area that it could not break over late yesterday as previously mentioned. This new first resistance level turned things back and after a choppy pattern with smaller gains and small losses until around11:40am, the bottom sort of fell out as things underwent a sharp collapse as the Dow declined to a loss of as much as 115 at 12:50pm, from which level it has stabilized a bit and is currently lower by 65 as this is being written.

After Tuesday’s disappointing intraday downside lower reversal close, the market really did not have a chance yesterday, as things opened lower and proceeded to worsen as the day moved along. The Dow opened with a 40 point decline right out of the starting gate, from which it underwent one of those steady negative down-staircase patterns, where each successive high got lower as the day proceeded and each successive low got worse as well, until it reached the worst level of the day at a 232 point shellacking at 2:30pm. From that point until the close, the declines stabilized but yet the market was not really able to muster any kind of upside momentum and kept exhaling more than it inhaled and when the closing bell mercifully rang, the Dow closed with a loss of 216. The S&P fell to its lowest level since May 2nd, which basically wipes out the gains it had made last month.

So what was the problem this time? And the answer is that the market went back to what I had said on Reuters earlier in the week when I mentioned that we could be in for a “bad news is bad news syndrome”, as the market is now in the mindset of looking for reasons to go lower, instead of looking for reasons to go higher, as was the prevalent thinking earlier in the year when stocks jumped on any event in order to justify the push to record highs in most major averages. And it now appears that the closing highs achieved on Tuesday, May 21st, which were added to intraday early on Wednesday, May 22nd before Fed Chairman Bernanke gave investors reasons to be completely confused on what the future course of central bank actions are going to be, now look like they will be upside points to beat. And now this may not be achieved during the traditionally weak summer time frame and might now have to wait until the usual late in the year rally. And these upside points are Dow 15,500 and S&P 1680, just to round them off.

And the ostensible “bad” news was that good old ADP, they of the being completely off-base in their monthly jobs report estimates (i.e. last month when they were only 46,000 lower at 119,000 versus the still official 165,000 figure) came out with another lower than official estimate for tomorrow’s report at 135,000. Let it be remembered that the official consensus is sometimes as bad as the ADP numbers, and we will all be smarter at 8:30am tomorrow morning. In addition, April factory orders rose by less than forecast and even though the May ISM Non-Manufacturing Survey came in above consensus, the employment component was lower than forecast, so we will see how this might or might not affect tomorrow’s jobs report.

Then to throw in another ostensible reason for the negativity, the Fed Beige Book, released at 2pm, mentioned that the economy expanded at a “modest to moderate” pace, and is this supposed to be bullish or bearish? In any event, by that time the downside damage had already been done, but as mentioned above, things did deteriorate to their worst levels of the session 30 minutes after the release of the Beige Book, so obviously it gave investors another reason to sell, for whatever thinking process was behind that attitude.

Meanwhile the VIX had another upside field-day as it rose by 1.23 up to 17.50 which is just short of the level it reached in mid-April after the other largest downside correction this year, which has now been in the 3.5-3.8% range on a closing basis, although intraday it is somewhat worse. Breadth numbers were awful as one would expect them to be on a day when the major averages underwent a decline of this magnitude, at a 1 to 4 negative ratio. And for what it is worth, the Dow now closed below the nice round 15,000 level and three late attempts to move above it were all turned back as well.

The 10-year Treasury note, after declining in price by that huge amount last month and earlier this week on the “certainty” that the Fed was going to start withdrawing its stimulus, went back to its old role as an ostensible “safe haven”, after inflicting large losses on those who used that rationale to buy last month to get the yields as low as 1.63%. As a result, the current yield fell back down to 2.09%.

The Euro was little changed but both crude oil and gold rose, as the summer driving season is upon us and gold keeps moving further away from that $1,350 support level which now appears to be the bottom despite all of the negativity that surrounded it on the breakdown two months ago.

Breadth numbers, which had been doing well even when the Dow was showing only nominal gains, are currently at a 14/15 slightly negative ratio as the Dow is showing the current losses that it is. And the reasons for why things fell apart once again? Ostensibly it was a combination of the Draghi comments which illustrate the good news is bad news syndrome, plus some experts had the nerve to say that it was the decline in weekly jobless claims that is putting more credence into the fact that the Fed will likely decrease its stimulus, even though this is not the survey week that is going to be used for tomorrow’s jobs report, but never mind.

What is probably doing stocks in to some extent is the fact that outside markets are showing inflows as for instance bond yields are declining for the second day in a row on, don’t tell me, their role as a “safe haven”, but then how do lower bond yields correspond to the fact that the “explanation” for lower stocks is that the E.C.B. statements mean that central banks are not going to be adding to their stimulus measures? And how about the Euro, which is making a very large gain on the Draghi comments, all the way up to 1.325, its highest level since February. This is all that crude oil needs to see, as remember how I mentioned last week when prices were in the low 90’s that the oil companies would not allow them to stay at the lower levels with the summer driving season upon us, so now the price is up to $95, for a large gain of $1.30 a barrel. And naturally gold is going along for the upside ride as well, so in a sense these outside markets are giving some sort of “anxiety” push to the downside.

An to make things even more anxiety-laden ahead of the jobs report, how about the VIX, which is now above the April high and is currently at its highest level since February at 18.54, which of course raises the question of how bad is the reaction to tomorrow’s report going to be, as the market is heading into it in a very weakened condition, so the bar for failure is going to be set rather low.

But on the other hand, do investors root for a weaker report, which then could lead to more selling on the bad news is bad news syndrome, which drove stocks lower yesterday, or do they root for a stronger one, which could also lead to a selloff on the good news is bad news dynamic like we are seeing today, so these are the potentially unpleasant scenarios that investors will now be facing going into the numbers.

The week’s highlight is of course tomorrow’s May jobs report, and the current estimate is for a gain of 165,000, which would be the same as last month and we just discussed the potential implications of this.

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}.