4-14-16 – Where is the market going?

Stocks are modestly higher after two days of big gains. The S&P 500 is up 2.82 points to 2085.24 midday Thursday and adding to the 40-point rally Tuesday through Wednesday.

With the S&P at 2016 highs and the latest jobless claims coming in better-than-expected, Treasury bonds are seeing a second day of weakness and the yield on the benchmark ten-year Treasury is ticking back towards 1.8%.

Crude oil is testing 2016 highs near $42 per barrel. Gold lost $16.5 to $1232.

On Wall Street, six of ten market sectors are higher, led by Financials (XLF), Telecomm (IYZ), and Industrials (XLI). Utilities (XLU) and Consumer Staples (XLP) are seeing relative weakness.

CBOE Volatility Index (.VIX) is off .39 to 13.45 and back within striking distance of 2016 closing lows of 13.10 from April 1st. Meanwhile, options volumes are running about the normal levels. Roughly 3.6 million calls and 3.1 million puts traded across the exchanges during the first two hours.

Bank of America (BAC) Apr 14 calls, VIX May 25 calls, and Valeant Pharmaceuticals (VRX) May 6th Weekly 30.5 puts are the most actives.

Looking forward, economic data tomorrow includes Industrial Production and Univ of Michigan and the calendar is light next week, outside of a handful of reports on housing.

Instead, profits will the main focus as the pace of first earnings reports picks up noticeably. The reaction to the early numbers has been net positive, as financials are seeing a second day of relative strength on better-than-feared results from BofA, JP Morgan (JPM), and Wells Fargo (WFC).

Consequently, XLF is up 4.5% on the week, and as we can see from the chart below, is at multi-month highs. The ETF is up 17.2% since from its February 11th lows.

The gains in the financials, along with the strength in crude oil, are important reasons for the new 2016 highs in the S&P 500. These two sectors are showing the most substantial year-over-year earnings declines and their relative strength suggests that investors are looking beyond the recent earnings trough to better days ahead.

Yet, it would certainly be premature to assume that these early results suggest that Corporate America will beat Street expectations throughout the earnings reporting period, just as it would be too early to say that the Blackhawks will be eliminated from the playoffs after losing just game 1 to the St. Louis Blues.

There is a lot of game left to be played and overall earnings are expected to be negative through the first and second quarters, before turning positive again in the second half of 2016. Therefore, it will be important for companies to reinforce those expectations with positive guidance as the earnings season unfolds in the weeks ahead. If not, the recent rally in the equities market is unlikely to hold.

For now, the S&P 500 is an uptrend and notching 2016 highs. Short-term support is at 2082, 2072, and 2065. Upside resistance at today’s highs of 2086, then 2090 and a run up to 2100.