January 26, 2011

NATIONAL
SECURITIES
Established 1947, Member FINRA/SIPC
Daily Market Notes
Let’s see now - for the second time this week, the foolish buying of out of the
Market Update:
money calls on the VIX, as advocated by Barron’s over the weekend, badly

DJIA: 11993
backfired on those who engaged in this strategy. On Monday, the VIX rose to

S&P 500: 1296 as high as 18.93, right into the upper end of its resistance band, which then
Nasdaq: 2738 allowed the Dow to undergo its best rally since December 1st, and it gained 108
points. Yesterday, after the major averages were lower for the bulk of the day
VIX: 16.98 because of the belief in some quarters that the market cannot sustain the
record gains of the past two years, the VIX got as high as 18.55 at 3pm when
10YR T-Note: 3.41%
the Dow was on its low of the day, down by 82 points.

EUR/USD: 1.367
Then all of a sudden out of nowhere, things made a dramatic turnaround to the
Gold 1328 upside, led by the Nasdaq, which went slightly positive near the close, as did
Crude Oil: 86.80 the S&P as well. The Dow was able to turn that 82 point loss into a closing
decline of only 3 points, and breadth numbers, which had been negative all
Prices Current as of
1:05 PM day, actually turned positive as well, at a 16/14 ratio. And as the market staged
Source: Bloomberg this terrific late comeback, the VIX declined from those highs, ending lower by
.06, to 17.59. So for the second day in a row, the bearish contingent certainly
ended up on the wrong end of things, as even at these elevated levels, the
Donald M. Selkin
Chief Market Strategist
market so far has not shown any sort of willingness to undergo a meaningful

(212) 417-8017
dselkin@nationalsecurities.com
____________________
downside correction. Of course, this does not mean that a substantial selloff is
not in the works, especially as we enter the historically treacherous month of
February, which is the second worst for stocks. And if there is in fact going to
be a correction, it would seem that next month would be the time for one, as in
2010, during every month after the earnings reporting period, namely February,
May, August and November, we did see the market correct to the downside
before resuming its eventual upside move.

Yesterday’s late upside turnaround was led by the large mobile telecom stock,
whose selloff every day last week was a function of the announcement about
its C.E.O. and also the successful attempt to keep huge numbers of call
options out of the money at Friday’s options expiration close. In addition,
some of the high priced technology leaders, which have come under some

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January 26, 2011
NATIONAL
SECURITIES
Established 1947, Member FINRA/SIPC
Daily Market Notes
pressure lately, bounced back as well. But two of the faded technology heroes
of the 1990’s, which have done nothing for 10 years, are starting to show signs
of life, namely the largest networking Internet products company and the
largest semiconductor maker, and the latter did announce a dividend increase
so it now yields 3.3%, higher than many defensive blue-chip types of stocks
and also sports a low price/earnings multiple of 11 to 1, and these statistics
would certainly qualify it as a value stock.

The Dow was led by another new high in its highest priced technology
component, which has been unstoppable on the upside since its earnings
report last week. In addition, the largest retailer, for whatever reason, also
showed a strong advance. On the negative side, the Dow was restrained from
weak showings by members the financial and credit card company, the
medical products stocks and a diversified manufacturing company after their
reports came in below expectations. And the insurance component and a
telephone company faded from their best levels after their reports even as the
Dow staged its late furious comeback.

Things had started out lower and remained lower until 3pm as mentioned
above based on negative news from overseas, as India raised interest rates to
try to contain inflation brought about by its strong economic growth, similar to
what China has done these past few months, and this had the effect of
knocking down the price of many commodities which in my opinion are way
too high, such as crude oil and the precious metals. In addition, the U.K.
reported a negative G.D.P. growth of 0.5% for the fourth-quarter when
a gain of this amount was anticipated. Perhaps a reason for the late comeback
was some optimism over what the President would say in his State of the
Union address last night.

Today the Dow perhaps is finding the air too thin above 12,000, the first time it
reached this high since June 2008, as if the Lehman bankruptcy never
happened and all of the investors who were forced to sell as the market

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January 26, 2011
NATIONAL
SECURITIES
Established 1947, Member FINRA/SIPC
Daily Market Notes
cratered later that year and into early 2009 will now get their money back. For a
change from last week, when it was the only major average to end higher, the
Dow is lagging relative to the overall market today on weakness in the airplane
manufacturer, which is accounting for 20 points of Dow losses by itself.
Breadth numbers, on the other hand, are strong at a 20/9 positive ratio. The VIX
continues to decline as the overall market does better, and is now down to 17,
still above its support level of 15.40, so people should get used to this as the
downside and that high 18 level as the upside resistance, and perhaps trade
accordingly. These levels have held since early December and until they are
broken one way or the other, they must be respected.

Positive factors for today include the President making nice to business by
proposing lower corporate tax rates in addition to a freeze on non-defense
discretionary spending in order to save $400 billion during the next decade.
This is somewhat of a smoke and mirrors issue because it accounts for such a
small percentage of the deficit. He also proposed additional cuts of $78 billion
in the defense budget itself.

December new home sales rose by 18%, which was the largest gain since 1992,
but this number should be taken with the traditional grain of salt for two
reasons – the overall total for 2010 was a decline of 14%, which was the largest
since records for this have been kept since 1963. In addition, and more
importantly, new home sales are counted when the contract is SIGNED, as
opposed to existing home sales, which are counted when the contract
CLOSES, and how many of the people who sign contracts are going to get
rejected by the banks and other lenders?

The earnings season is turning out to be a very good one, as 103 of the 119
S&P companies to have reported so far have beaten the estimates, and this
87% beating rate is higher than the 74% quarterly beating rate since the bull
market began in March 2009.

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January 26, 2011
NATIONAL
SECURITIES
Established 1947, Member FINRA/SIPC
Daily Market Notes
The next major hurdle for the market today will be the 2:15pm release of the
F.O.M.C. statement, and if they asked me to write it I would say that “The
federal funds rate will be held at current levels of zero to ¼% for an extended
period of time, we see some improvements in the labor market and some signs
of stability in housing. Economic growth is picking up as well due to the
influence of the stimulus programs currently in effect and inflation is still not a
concern even though there are some signs of it in energy and fabric prices”,
thank you very much – but they did not ask me to write it, but I am willing to
predict that their statement will be very similar to what is written here.

Thursday sees December durable goods orders, weekly jobless claims and
December pending home sales. Friday sees the first estimate of the fourth-
quarter G.D.P., which is supposed to show an advance of 3.5% from the third-
quarter gain of 2.6%. We also get the January final U. of Michigan Consumer
Sentiment Survey.

Other Dow components reporting this week include: Thursday: CAT, MSFT, PG
and T; Friday: CVX. There are other important companies reporting, and they
are too numerous to list, but some of the more interesting ones are: this
evening: NFLX, QCOM, SBUX; Thursday: MO, LMT, LLY, POT, SNDK and
AMZN.

The S&P trades at 13.5 times forward earnings, and 15.2 times current
earnings, if one assumes that this year’s earnings are going to come in at $82
for the S&P and $92 for 2011. The average P/E multiple for the S&P going back
to 1954 has been 16.2.

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January 26, 2011
NATIONAL
SECURITIES
Established 1947, Member FINRA/SIPC
Daily Market Notes
According to the sector analysts who follow these companies individually, for
all of 2010, earnings are projected to increase by +33%, which would be the
most since 1988, followed by earnings increases of +14% in 2011, as reported
by Bloomberg Financial, and this would be the largest two-year advance since
the period ended in 1995. First quarter profits rose by +52%. Second-quarter
profits rose by +49%, the third-quarter rose by +28%. The fourth-quarter is
supposed to gain by +22%. If these numbers do come to fruition, then S&P
earnings should be around $83 for 2010 and between $93 to $95 for the S&P in
2011. This would equate to around a 14% gain this year. The highest ever
earnings for the S&P in one year took place in 2006, at $88.

After four consecutive quarters of negative G.D.P. growth, we now have four
consecutive quarters of positive growth, starting with the third-quarter of 2009
and continuing with the first quarter of 2010 with a gain of +3.7%, the second-
quarter gaining +1.6%, and the third-quarter was ahead by 2.5%, according to
the Commerce Department. Economists now predict that G.D.P. will expand by
3.5% in the fourth quarter, and for 2011, the prediction is G.D.P. growth of 3%
and it is 3.2% in 2012.

Donald M. Selkin

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January 26, 2011
NATIONAL
SECURITIES
Established 1947, Member FINRA/SIPC
Daily Market Notes

Disclosures
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}. It is possible that at any given point in time, the author, NSC, or one
or more of its employees or registered individuals associated with NSC, may hold a position, either long, or
short, as well as options, bonds, or other instruments in the companies noted in this report. This Market
Letter is intended strictly for current National Securities Corporation customers only.

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