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JPMorgan Earnings Due, Amid Worries China Could Stall Rally

NYSE trader
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NYSE trader

Earnings from J.P. Morgan and Google bookend the trading day Thursday, as traders shift their focus back to the health of the global economy.

There were signs of that Wednesday, as a whiff of worry about the Chinese economic engine hit risk assets midafternoon. Markets reacted to a Financial Times report that China had revealed copper inventories for the first time, showing it had 1.9 million tons at the end of 2010, equal to the amount the U.S. consumes in a year. That helped cool a rally in copper and other risk assets, even though stocks still finished the day nearly a percent higher and copper was positive on the day.

"If you take a look right after that story hit, commodities took a U-turn," said Brian Dolan of Forex.com. Dolan said traders were watching China's trade data overnight.

"This is a market that's in constant need of reinforcement," he said. "This rebound has really gone on much longer than I expected. In stocks, the euro, commodities. It's been a massive short squeeze. People got really short and they're getting crucified right now."

There is also U.S. data Thursday, with weekly jobless claims and international trade data at 8:30 a.m. ET. The Treasury also auctions $13 billion in 30-year bonds at 1 p.m.

The Dow ended Wednesday up 102 at 11,518, and the S&P 500 was up 11 at 1,207, as the market was reassured by Slovakian agreement on the EFSF (European Financial Stability Facility) bailout fund. The S&P is now up more than 9 percent since Oct. 3 when it plunged to 1,074. As of that day, it was down more than 12 percent for the year but has since rallied on optimism that European leaders are working on a bigger fix for their sovereign debt crisis.

Financials were the favorites of the day, with the S&P financial sector gaining 2.7 percent. However, the group came off its highs after another Financial Times report suggested that European banks could shrink themselves to avoid new rules to increase capital.

J.P. Morgan earnings were also the talk of the day, and that stock finished higher. It is viewed as a bellwether for banks and the best of breed in the sector. Citigroup and Bank of America shares were sharply higher.

"Obviously they were well oversold. Some of this new money, some of this asset allocation money is going in and attacking the financials first," said one trader.

J.P. Morgan earnings are expected to come in at $0.94 per share, when they are released ahead of the opening bell. The company holds a conference call at 10 a.m. ET.

Google is expected to report profits of $8.74 per share and revenues of $7.21 billion, when it reports after Thursday's market close. Birinyi Associates notes that Google has beaten estimates 76 percent of the time, and when it does, its stock opens higher the next day about two-thirds of the time. But by the close that day, its stock usually finishes lower regardless of whether it beat estimates or not.

Stock Rally Moment of Truth?

Some strategists believe that the market hit its low of the year when the S&P fell sharply Oct. 3. Now the question is where the top of the range will be, and many analysts are watching the 1,220 to 1,230 level on the S&P.

"Although the bottom may have been recorded earlier this month, we believe it may be too soon to say that a new cyclical surge is at hand," Standard and Poor's strategist Sam Stovall wrote. He, like others, is watching the heavy resistance zone of 1,220 to 1,230, and he expects the S&P to pull back to 1,150 to 1,170 before making another leg up.

"We see the second rally of this advance pushing the index up into the 1,250 to 1,265 zone, and then we believe the moment of truth for the market will be upon us," he said.

Stovall, in a note, points out that since the year 1900, there have been 22 times that the S&P 500 declined between 10 and 20 percent. In those years, the S&P posted a median decline of 4.5 percent and registered an increase for the year just 41 percent of the time. He said the odds, therefore, favor a down year for the S&P.

What Else to Watch

iPhone 4S goes on sale Thursday, just as Apple rival Research in Motion suffers from an embarrassing outage that aggravated customers around the globe. The Blackberry outage has been going on sporadically for several days. RIM vowed to deliver all the delayed emails and has said the outage was due to a core switch failure with in its network.

Minneapolis Fed President Narayana Kocherlakota speaks at 2:30 p.m. to business leaders in Montana.

Questions? Comments? Email us at marketinsider@cnbc.com Follow me on twitter @pattidomm

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