The tide appears to be turning to the downside to some extent after yesterday’s shellacking, as the scorecard is now going to read that the Dow has undergone triple-digit moves in 7 out of the past 11 sessions, and of the 7, four have now been to the downside while only 3 have been higher. And yesterday’s late selloff into a closing Dow loss of 116 put the icing on the cake for the take it for granted bullish case, so to speak.

Believe it or not, this was not its worst level of the day, as it started out right out of the opening gate with a fast 152 point loss, from which level it began then steadied and began an upside acceleration at 10:20am and actually had the nerve to be a fast 13 points higher at 11:30am. From these highs, it sort of steadied for the next two hours until a rapid downside acceleration took it to a 115 point loss at 2pm, from which it tried to recover by now being 60 points lower at 3pm before a final very late selloff took it back down again to that 116 point lower close.

The problem with that rally to the intraday highs as mentioned above was that it was not followed by the broader market and was sort of a Dow extravaganza just by itself, as the troops could not follow the generals to the upside, as breadth numbers stayed weak and actually ended at a horrible negative 1/6.5 ratio, and even when the Dow was at those best levels of the day the ratio was still a very poor negative 1/3.

And the VIX, which has been flexing its upside muscles recently, really felt it as it rallied by a large 1.63 up to 17.07 and that 11.30 low back in March is now beginning to feel like more and more of a mirage, especially with the traditional summer weakness period upon us.

Bond yields actually had the nerve to cool off a bit after reaching their highest levels this year for the 10-year note and the highest in more than a year for the 30-year maturity, as apparently there was good bidding in the first part of the $66 billion Treasury sales this week, as the former cooled off to 2.19% while the latter also stayed calm at 3.32%, but the trend has been definitely to the upside after the May 22nd Fed minutes and the testimony of its chairman changed the extremely low interest rate picture for the near and probably farther future as well.

So what was the cause of the downside misery for stocks, and the answer ostensibly came from comments out of Japan, as once again investors looked to developments outside the U.S. as apparently what got people all bent out of shape early was a statement from the Bank of Japan governor to the effect that their central bank will consider new steps to calm markets if borrowing costs jump higher in the future, but for the time being they held off on new stimulus measures, as they argued that bond markets had stabilized. They stuck to their April pledge to expand the money supply at a 60-70 trillion yen rate, which equates to $605 billion dollars. This apparently shocked investors who had thought that new stimulus measures were on the way, and this resulted in a gain for the yen and declines in both the Japanese stock and bond market, and this is what caused the worldwide cascade of selling, which obviously spilled right over to our shores.

As a result, the yen rallied by the most in three years against the dollar down to 96, which resulted in a selloff in the Japanese stock market. The Euro was quiet at its recent higher levels. Crude oil was lower by $2 a barrel early down to $94 but ended only lower by $1 down to $95, as the forces that be are not going to let this item decline too much with the summer driving season upon us. Gold once again dug in its heels above the $1,350 support level which looks like it is not going to be broken on the downside in the near future.

After two straight down days for the Dow to start the week, the question for today now becomes – is that streak about to come to an end, namely the first 3-day consecutive decline this year? And certainly it did not seem that way at the start, as the various stock index futures were trading well above fair value and as a result, the Dow jumped right out of the starting gate to a very fast but once again unfortunately unsustainable gain of 119 points at its best level very early. But this proved to be a mirage once again as breadth numbers went from nicely positive to negative very fast and the Nasdaq turned lower at 10am, and for today the old-time pattern of the Nasdaq not following along with the Dow on the upside is ruling the day.

On the other hand, if the Dow does manage to avoid its third consecutive decline for the first time this year, it will have to do the heavy lifting by itself because breadth numbers are negative at a more than 1 to 2 downside ratio and as the Dow has fallen from its early highs, the S&P, Nasdaq and Russell 2000 Index of small stocks are all getting worse as well, and they never really gave the Dow any early support in the first place. The Dow fell rapidly from that early mirage high to as low as a loss of 83 points at 12 noon and is perhaps trying to stabilize at the lower levels for another push into positive territory later in the session, but once again it will have to be a solo job, because for instance those high-priced technology stocks have weakened, with AAPL about to sock it to the large contingent of call buyers at 450 and above for this Friday’s weekly expiration and others such as AMZN, GOOG, NFLX and PCLN all lower after higher starts as well.

If things do not stabilize today, then we are now seeing a dramatic turn in investor thinking in the sense that instead of buying on dips, the market is now seeing selling on strength, as for instance we saw this on Monday as things ended nominally lower after being higher, yesterday saw the attempt to do better aborted by the close, and today is seeing that early triple-digit gain turn into a loss.

Similar to yesterday, bond yields are turning back to unchanged after having been initially higher on the fact that better stocks showed that the economy is doing well, but similar to yesterday, that perception is changing as things have deteriorated. And as I have been warning, we see higher oil prices also have a deleterious effect as well, with crude up to its highest level in three weeks, just as the oil companies hope for as summer is moving into high gear. It is now over $96 a barrel. Gold is also moving up a bit as it refuses to drop below that $1,350 support area.

As things are deteriorating as this is being written, the chances for a late Dow comeback are lessening, although they are not impossible, but with the losses now at 70 points, things have made a large intraday downside reversal, so on the way back up, if that does in fact come about, the resistance is going to be building. And the VIX is back up to slightly over 18, which has been a resistance level, so this is going to also be important in determining whether or not a comeback is going to be in the cards.

Economic reports this week will be all later in the week with: Thursday – May advance retail sales, weekly jobless claims, May import price index, April business inventories; Friday – May P.P.I., May industrial production and capacity utilization, preliminary June U. of Michigan Consumer Sentiment Survey.

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}.