Stocks Rally Despite Some Weak Earnings Reports

The stock market has put together a furious rally to end the second quarter. The S&P 500 took out two important resistance levels at 1,280 and 1,301. It is currently up against yet another resistance point at 1,320. TradeMaster’s Jason Cimpl thinks we hit 1335 before a pull back, and told his subscribers this morning that he too thinks a pull back is near.

It’s interesting to note how quickly the mood shifted from bearish to bullish. The Greek debt situation suddenly became manageable, Bank of America (NYSE:BAC) settled a huge number of mortgage put-back issues for $9 billion, and the drumbeat of a stronger second half of the year was quite loud.

Financials, technology and energy stocks have been out in front of this relief rally. These stocks were also leading the recent declines, so we can certainly conclude that short-covering has been an important aspect of the recent move higher.

It’s easy to imagine that traders would not want to be short heading into 2Q earnings season. Even though there is skepticism that earnings can continue to grow at such string pace, the reality is that earnings have been growing steadily. It would not be wise to simply assume that earnings (and guidance) will be poor for the second quarter.

While we have seen some weak earnings reports over the last two weeks, most notably from Micron Technology (NYSE:MU) and Oracle (Nasdaq:ORCL), we’ve also gotten solid reports from
FedEx (NYSE:FDX) and Nike (NYSE:NKE).

I realize that doesn’t help much. But it shows why shorts might cover their positions ahead of earnings — there’s just no telling how earnings will come in. (Though if I had to guess, I would say that earnings will be solid and companies will talk about a stronger second half.)

In any event, earnings season kicks off on July 11. I don’t expect much more upside before then. But I would point out that the mood can easily shift back to bearish just as quickly as it went bullish a few days ago.

I’m going to keep today’s letter a little short. I’m sure many of you are getting started on your Independence Day holiday a little early. Have a great holiday, and if you’re driving, please be careful out there.

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