How about a week that saw the Dow undergo its second worst performance of the year (Wednesday’s 217 point downside shellacking) and then saw the Dow’s second best performance of the year with a 202 point gain on Friday? This means that in the span of three days, we had this sequence of events, which is about as neurotic a performance from the market as there has been in a long time.
And as the world knows by now, Friday’s upside moonshot was the result of the May jobs report, which gained 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.
The initial reaction was mildly positive, with the Dow starting out with a 50 point advance, which began to accelerate at 10am very rapidly to a 202 point gain at 11:30am, before a bit of a pullback to a 130 point advance at 2:30pm before another strong upside spurt to finish at that 202 point higher closing level.
Breadth numbers were at a 21/9 positive ratio and the VIX declined once again by less than it should have, which will continue to support higher stock prices, as it fell by only 1.40 down to 15.14, which then gives the market more theoretical room to move to the upside.
And how about the performance of some individual stocks, as for instance AAPL turned a 5 point initial loss into a closing gain of 3, and I believe that this was done in order to move it above the large concentration of puts that were in effect for the weekly options expiration at the 435 and 440 strike prices. And then there was BAC, which settled below the 14 strike price for the second week in a row after the major weekly financial publication had advocated buying calls at that level and above the 13 price as well, where there was an equally large concentration of puts, which assured that the overwhelmingly large contingent who bought this merchandise at either end finished with nothing.
And as stocks rallied, Treasury yields rose as well on the inevitability of the Fed finally lessening the full stimulus programs that are currently in effect, with the 10-year yield up to 2.18%. The Euro made a large gain, up to 1.322 for nothing in particular on its own merits especially with yields in this country on the rise, and it was perhaps more of a function of the Japanese yen rallying back to 97.56 to the dollar after having been recently as low as 103. Crude oil could not resist the upside fun and as a result, it pushed as high as $96 a barrel, which meant that for the week it rose by $4 a barrel just as the summer driving season is upon us. On the other hand, gold took a huge beating to the downside as it declined all the way to $1,380, where support has developed $30 lower, and this decline was ostensibly because of the perception that the Fed is not going to be as generous as it has been with stimulus, although one would like to think that this would have helped the dollar do better, which is did not.
After Friday’s upside moonshot, things today are very mixed, as the Dow began the session with a fast gain of 44 points right out of the starting gate, which has been its best level so far, then rapidly declined to a loss of 37 points at 10:15am, its worst level so far, from which it then went back positive and has chopped around in a very narrow range and is lower by 10 as this is being written, with IBM, DIS and CAT accounting for 22 points of Dow losses just by themselves. On the other hand, the Nasdaq is doing better due to good gains in AAPL on some hopefully positive new products at today’s developers conference, in addition to AMZN breaking out of its recent trading range on the upside, and GOOG and PCLN doing well also.
Breadth numbers are negative at a 13/17 downside ratio despite the fact that all of the major averages except the Dow, including the Russell 2000 Index of small stocks are higher. The VIX has been narrowly mixed on either side of unchanged but once again appears as it will use any excuse today to push a little higher unless the market turns around to the upside later in the day, which might not be possible considering the very late upside push on Friday as mentioned above.
The bond market is pushing yields higher once again, as for instance the 30-year maturity is at its highest level in more than a year at 3.37% while the 10-year is up to 2.22%, and this could partly be the result of good old Standard & Poor’s actually revising its credit outlook for the U.S. government to stable from negative, citing Congress’s avoidance of the year-end 2012 fiscal cliff (remember that word?) and the higher than expected tax receipts that followed. They said that even raising the debt ceiling will not affect this rating. They said that the chances of a ratings downgrade are now less than one in three “due to improvements in tax receipts and economic performance, which are helping to bring down the country’s debt levels.” And let us not forget that horrible August 2011 first-ever downgrade of the sovereign credit rating of the U.S. from AAA to AA-plus by this outfit, which is the second highest rating and they also left the U.S. credit outlook negative at that time.
Then we heard from one of the more dovish members of the F.O.M.C., namely the St. Louis Fed President who said that an inflation level below the Fed’s 2% target warrants prolonging the “aggressive” bond buying in order to bring down the unemployment rate and hopefully increase growth at the same time. He mentioned that while labor market conditions have improved since last summer, “surprisingly low inflation readings may mean that the committee can maintain its aggressive program over a longer time frame.”
Then we had the news from Japan that their growth rate has been revised upward to 4.1% and consumer confidence there was at its highest since 2007, which resulted in the largest gain in Japanese stocks since March 2011 at a 5.2% advance. The yen declined back to 98.64 and it is now lower against the dollar by 17% in the last six months. On the other hand, the Euro is recouping its early losses and is up to 1.324 and this is a little difficult to figure out.
Gold is struggling to stay above that $1,350 support level as buyers are entering at the lower levels but at least crude oil is cooling off a bit from last week’s strong advance and is down to around $95.60.
So whatever way the market closes today will be “explained” by various experts using the contradictory items that have manifested themselves so far, as stocks basically are largely mixed.
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}.