Employment Report Sparks Rally- Financial Reports Due Soon

Stocks rallied for a third day and are near session highs into midday Tuesday. The S&P 500 is up 17 points to 2154.33 and continuing this week’s move into unchartered territory.

With little economic data to guide trading, Treasury bonds are lower and suffering big losses for a second day as investors flock to equities. The yield on the benchmark ten-year is up to 1.48%, from just 1.37% on Friday.

Gold dropped $10 to $1346.50, but crude oil added $1.30 to $46.05.

On Wall Street, Energy (XLE) is the best gainer as crude oil bubbles higher. Basic Materials (XLB), Financials (XLF), and Telecomm (IYZ) are outperforming as well. Utilities (XLU) are seeing relative weakness.

CBOE Volatility Index (.VIX) is up .03 to 13.57 and heavy call volume, as well as relatively light put activity, reflects the bullish underlying tone. Roughly 5.7 million calls and 3.8 million puts traded across the exchanges through midday. Projected volume for the day is 18.4 million and 10% greater than the one-month daily average.

SPDR 500 Trust (SPY) Jul 29th 215.5 calls, Jul 215 calls and Jul 218 calls are the most actively traded contracts today. In fact, eight of the ten most active options today are call options on the SPYders.

Yet, although the S&P 500 is forging new highs and call activity in the SPYders is running at a brisk pace, the bullish sentiment will certainly be tested as the second quarter earnings results unfold in the weeks ahead. The pace of reports picks up later this week with many of the big financials due to report Thursday and Friday. Then a barrage of results hit the wires next week.

The chart below shows how the SPDR Financial Fund has been rallying in the weeks leading up to the profit numbers. Shares have gained nearly 9% since June 27th and, in the process, reclaimed both the 50 and 200-day moving averages.

See Tradespoon’s Stock Forecast on Select Sector SPDR Financial Fund (XLF)

Tradespoon’s Stock Forecast on Select Sector SPDR Financial Fund (XLF)

Zack’s expects S&P 500 companies to post a 6.2% decline in overall earnings for the second quarter compared to a year ago. Growth is expected to be flat in the third quarter and then improve in the fourth quarter. Energy and financials have been among the worst earnings performers through recent earnings reporting cycles, hurt by falling oil prices and low interest rates. Therefore, it will be interesting to hear what the big banks say about the outlook for the second half of 2016 when they report later this week. The best-case scenario might already be baked into the cake.

And let’s not forget that the three-day rally started with better than expected jobs data Friday and therefore economic data Thursday and Friday, including Retail Sales, inflation, and Industrial Production data, have market moving potential as well.

For now, the S&P 500 seems to be facing some resistance around the 2155 level. Short-term support is likely at 2137, 2125, and 2115.