Yesterday’s wild market action had something for everyone, as the Dow underwent an astounding196 point intraday upside reversal after the VIX reached its highest level since late February and the S&P briefly moved below its 50-day moving average, which is supposed to be some sort of sell signal to those who follow these technical disciplines.
The Dow began with a 40 point advance early as it tried to do away with Wednesday’s horrible showing when it underwent that decline of 216 points. It then chopped around between small gains and losses until 11:45am, at which time it made a sudden sharp drop to a 116 point loss at what turned out to be its 1pm low. From this level it began a choppy upside recovery and finally got back to unchanged at 2:20pm, from which it once again made a very late upside acceleration to end with a final closing gain of 80, thereby accounting for that 196 point upside intraday reversal.
Breadth numbers were at an astounding 3.5 to 1 upside ratio, and even when the market was on its lows the relationship was only nominally negative, which meant that the market internals were somewhat strong and this was because the Russell 2000 Index only went slightly negative even at the market lows.
Then we had huge upside currency moves, as the Japanese yen rose to a seven-week high at 97 and the Euro rose to its highest level since late February at 1.325. And what was this about, and the supposed “explanation” was that the U.S. jobs report was going to be weak, surprise, surprise, which now meant that the Fed would be obliged to extend the full stimulus program further into the future. And this bizarre reasoning was based on the fact that weekly jobless claims, even though they came in lower, were measured against an upwardly revised number from the week before.
The VIX had the nerve to rally to its highest level since February as well, up to 18.51 when the market reached its lows but then finally reversed course and closed with a .87 decline to 16.63. What caused the dollar to weaken were comments from 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”. This resulted in those huge moves against the dollar as mentioned above.
That drop in the S&P to below its 50-day moving average was the first time that this had taken place since April 18th, which was the last time that the market had undergone a similar correction in the 3.5% – 4% area as it had now done on yesterday’s lows. That average happened to be 1604 and I would imagine that what caused the selling down to the lows is that the technical types who base trading decisions off of these types of things got bearish from 1604 down to the 1598 low. But did they ever get fooled as this index turned back to the upside and finished above the 50-day average, as it was now back up to 1622, and we might ask of those who followed that sell on the breakdown of the 50-day moving average – “So what did you accomplish?”
And how about the fact that by making that dramatic late-day surge to end with gains, the Dow kept its astounding streak alive this year of not closing down for two straight days intact, which is somewhat amazing in and of itself.
The bond market was somewhat quiet ahead of today’s jobs report, as it ended with yields nominally lower at 2.07% for the 10-year maturity, but when the market was in that middle of the day selling panic, the yields actually approached 2% on the thinking that if the stock market was so smart to get sold off like that for another day, then the economy must be in a weakening phase.
So after all of the anticipation and market experts of various stripes all sticking in their two cents on what today’s jobs report was going to look like, the big event finally arrived and the number for May was 175,000 in a nice show of resilience which probably means that the Fed could start to ease back on its stimulus programs sometime later this year. The unemployment rate ticked up to 7.5% as the size of the labor force increased as more people looked for jobs. Of course, this is now the third straight month that the number has come in below the important 200,000 level as well, and combined with the jobless rate, means that the Fed stimulus programs will probably stay intact until at least September.
There were small revisions to the two prior months, as April was lowered down to 149K from 165K while March rose a bit to 142K from 138K. And whatever happened to the ADP number of 135,000 which caused the people who predict today’s numbers to come down a bit as well, like little lemmings taking their marching orders and believing everything that they are told. The length of the hourly work week moved slightly higher while average hourly Earnings were unchanged, which means that they have risen by only 2% over the past year. The largest gains were in professional and business services and temporary jobs rose by 26,000 which could portend an eventual increase in full-time jobs.
Instead of a good news is bad news reaction to the report, the market took off to the upside in a large way, with the Dow at first higher by 45 or so points when it began to accelerate to the upside at 10am and reached its best level of the session so far with a 208 point gain at 11:30am from which it cooled off a bit and is currently ahead by 170 as this is being written.
Breadth numbers are at a positive 20/9 upside ratio and the VIX is lower by 1.25 down to 15.38, still higher than it should be, but let it also be remembered that the market has made triple-digit Dow moves in 6 out of the past 9 sessions, three in each direction, so I would imagine that the volatility factor is now higher than it should be. Bond yields are naturally higher on the stronger economy and the fact that the Fed will move sometime later this year, with the 10-year note up to 2.14%. Of course, this report will continue to give both sides of the Fed withdrawal stimulus argument plenty to blabber about and we do not have to rehash all of the justifications advanced by both sides, as they are well-known to all market observers and participants by now.
The Euro is easing back a bit after its very strong recent gains earlier this week but the Japanese yen continues moving higher. Crude oil naturally will use any excuse to rally, and is now up to $96 a barrel, which will now start to get to dangerous levels if it moves too much above this. Gold on the other hand is taking a large downside beating on the perception that the Fed will ease back on the current stimulus programs and is falling back closer to the $1,350 support level, still within its current trading range.
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}.