Today’s market has turned out to be somewhat astounding in my opinion, as a 40 point Dow advance has accelerated to another triple-digit situation with the best level reached at 1pm with a 140 point gain, that is now ahead by 130 as this is being written. Breadth numbers are at a positive 19/10 ratio and in an even more astounding situation, the VIX is having the nerve to remain unchanged at 16.80 despite the very strong move to the upside.
This is completely baffling, because remember that the June option series expires tomorrow at the opening, so if these people are waiting for a huge down move after the Fed announcement, they are going to be disappointed. On the other hand, there are VIX futures and various ETF’s that can keep going along with the trading that occurs in the post-2pm last two hours of the day, so this is perhaps what these VIX buyers in other venues are hoping for. In any event, assuming that the VIX remains below 17, there will be 1.63 million calls that expire worthless, which still goes to show that the overwhelming majority of VIX investors still do not know what they are doing.
As has happened more often than not lately, the Dow ended with a triple-digit move yesterday and it was a nice sense of relief because after three lower weeks out of the past four, the better close took away some of the anxieties that had been building in to investor expectations.
The Dow began with a sharp rise of 145 points right off of the opening bell courtesy of the various stock index futures that had moved steadily higher in the Sunday overnight session, and once again this was a function of the fact that the Japanese yen, which had become the ostensible bugaboo of investors lately as a result of the so-called “carry trade”, where investors supposedly borrow the yen to fund their purchases of stocks, and as long as the yen is weakening this is good because they can then pay back the borrowed yen in cheaper terms. So when this scenario goes bust, then they have to cover their short yen positions because the thing that they borrowed is now worth more, and in the process have to sell out their stocks to close out the entire trade.
As I have stated before, I do not believe in any of this and to me this sort of “explanation” is just another thing that market experts and television touts latch onto to try to “explain” what is going on, but in any event the yen did weaken somewhat against the dollar on Sunday evening and the Japanese stock market, after having risen by 55% this year, then declined by 20% into a bear market, now decided to rally on Sunday evening by 2.7% to the upside.
This then ostensibly motivated investors here to try to go back to the strategy that had worked so well earlier this year, namely to buy on the dips. And sure enough, things exploded to the upside as a result with the Dow reaching its best level of the day with a 191 point high at 11:10am. This is somewhat ironic in the sense that this is exactly the amount that the Dow has moved since the May 22nd Fed prepared statement and then contradictory answers by Chairman Bernanke to the House committee caused the market to undergo its recent severe gyrations in both directions. Before this recent period, the average daily journey of the Dow had been 110 points a day. This is the main reason that the VIX has been at relatively elevated levels compared to where it had been a few months ago, namely the volatility and uncertainty especially ahead of tomorrow’s Fed events.
From this best level of the day, things went into a bit of a downside collapse as the Dow then decided to drop to a gain of “only” 42 points, its low of the day, at 3pm. And what caused this huge swoon of around 150 downside points was a story out of the G8 meeting that the Fed may signal that it will scale back its monetary stimulus at the conclusion of this week’s policy meeting on Wednesday. Wait a minute – isn’t this sort of a given that there might be some sort of end-game plan announced tomorrow? And to further add to the ostensible “explanation” for the selloff was a further comment that Chairman Bernanke is “likely to signal” that the Fed is close to tapering the $85 billion bond buying program. If this isn’t a case of stating the obvious, then I do not know what is.
But from that point on, things got a hold of themselves and as a result, the Dow roared back to the upside once again and finished with a closing gain of 109 points, thus marking the 11th time out of the past 15 sessions that a triple-digit gain has taken place, and the scoreboard reads – 5 positive and 6 negative as of yesterday.
Breadth numbers were strong at a positive 2 to 1 ratio and once again the VIX ended much lower than it should have relative to the gains by the major averages as it declined by only .35 to 16.80 and believe it or not, when the Dow had the nerve to be only 42 points higher as described above, the VIX actually rose by .47, even though all of the major averages were still decently higher for the session. This shows how much anxiety that has been built into the market as investors are obviously working on the historical tendency of the market to decline sharply after the Fed statement and particularly after Bernanke says something, and last month’s negative market action was a perfect example of this.
Bond yields started to move higher once again in anticipation of further interest rate rises, with the 30-year yield up to 3.35% and the 10-year back to 2.18%. And the good old Japanese yen weakened a bit against the dollar in order to show that the yen-carry trade was ostensibly still a valid strategy, as it ended nominally lower at 94.61. The Euro fell back a bit as well, and ended around 1.33. Perhaps the biggest surprise was the fact that crude oil had the nerve to finish nominally lower after finding the air above $98 a barrel perhaps a little too thin, as despite the best efforts of participants in that arena to push it higher, I would imagine that the current huge gasoline inventories will eventually restrain its upside, as the stock market has never been able to sustain advances when prices reach more than $100 a barrel.
Also helping stocks in a general sense were two economic reports that came in better than expectations, as the June NY State Empire Manufacturing Survey showed its first advance since March and the June NAHB Housing Market Sentiment Indicator rose to its highest level in seven years.
Today, bond yields are sort of steady with the 30 and 10-year maturities remaining at 3.34% and 2.18% respectively while crude oil could not stand its day off to the downside yesterday and is back over the $98 a barrel level on – you guessed it – Middle East tensions, while gold is really taking another downside beating, to $1,367 and it will be interesting to see if what the Fed says tomorrow finally breaks it below its two-month support level at $1,350 or not.
Economic reports released this morning showed that the May C.P.I. is annualizing to a 1.4% inflation rate, still below the 2% Fed target as the first food price decline in almost four years is helping. May housing starts came in below consensus at a gain of 6.8% while building permits, an indicator of future activity, declined by 3.1%.
If these triple-digit Dow gains hold into the close, this will now even the scorecard at 6 positive and 6 negative out of the past 16 days, setting the table for what will certainly be a barnburner in the last two trading hours tomorrow.
Economic reports this week will include – Wednesday, the huge one, namely the F.O.M.C. statement and Bernanke press conference; Thursday – weekly jobless claims, June Philadelphia Fed Manufacturing Survey, May existing home sales and May L.E.I.
First quarter earnings for 2013 rose by 5% and the projection at the present time for the second quarter is for earnings to be just around flat, and then we will ostensibly see earnings advances of 4.6% for the third-quarter and 5.7% in the fourth-quarter.
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}.