Earnings Season on the Horizon

Stocks are broadly higher for a third day amid end of quarter position squaring. Heading into midday Thursday, the S&P 500 has added 12 points to 2082.77 and has now rebounded an impressive 4.2% since Monday.

For the quarter, the index is up 1.1%, but has lost .7% through the month of June.

Treasury bonds are bid despite surprising strength in the latest Chicago PMI Index (56.8 for June vs. 50 consensus estimates) and in-line jobless claims numbers. The yield on the benchmark ten-year eased to 1.47%.

Ten of ten market sectors are higher on Wall Street, led by Consumer Staples (XLP), Industrials (XLI), and Utilities (XLU).

CBOE Volatility Index (VIX) dropped another point to 15.64 and trading in the options market is relatively active as many quarterly contracts are expiring and tomorrow is an expiration for July 1st Weeklys. Roughly 3.5 million puts and 3.7 million calls traded through the first two hours. Projected volume for the day is 16.2 million contracts and 5% above the norm.

iShares Large Cap China Fund (FXI) September 30 puts and 36 calls are the most actives, as one player opened a substantial risk-reversal in the product. The position involved selling 75,000 September 30 puts and buying 75,000 September 36 calls, while also selling more than 3 million shares. SPDR 500 Trust (SPY) Jul 8th 225 calls, VIX 21 calls, and VIX 13 puts are the next most actives midday Thursday.

Looking forward, trading is likely to remain somewhat busy as the third quarter gets underway, as well as reports on manufacturing, construction spending, and monthly auto sales, but then taper off in afternoon action ahead of the long weekend.

Minutes from the June 15th FOMC meeting will come into focus when players return Tuesday and then focus turns to jobs, as ADP releases private sector numbers Thursday and the Labor Department’s monthly report is due Friday morning.

Before long, attention returns to the earnings front, as today is the last day of the second quarter. Alcoa (AA) unofficially kicks off the reporting period on July 11th. According to Zack’s, overall results for S&P 500 companies are expected to be down 6.1% for the second quarter on .7% lower revenues. Earnings growth will remain flat in the third quarter and then ramp up substantially in the fourth quarter.

Indeed, the S&P 500’s 1.1% gain in the face of dismal earnings since late-March has been driven partly by expectations for a turnaround in earnings in the second half of 2016. Now, however, it has become clear that meaningful earnings growth is not likely to occur until the fourth quarter.

Therefore, the S&P 500’s recent rebound could face an important test as the floodgates on earnings open in mid-July and continue into August, especially if companies warn that the stronger dollar and a sluggish global economy are expected to weigh further on corporate profits well into 2017.

Time will tell.

Until then, the S&P 500 staged an impressive rebound off of 2000 support (and a 200-day moving average) Monday and has been rallying since that time. The 50-day moving average near 2075 is a significant support/resistance level as well. Look for resistance 2086 and 2100 into the three-day weekend. Support likely at 2066 and 2050.

See Tradespoon’s Stock Forecast on S&P 500 (GSPC)