HR Block Beats, Spectrum Controls Reports Wednesday

Today marks the end of the second quarter, and many investors are now breathing a sigh of relief. The major averages have seen historical corrections with the Dow Jones Industrial Average touching levels not seen since 2006. The S&P 500 dropped to a 3-month low and below a key psychological level of 1,300, while the Nasdaq is actually on track to end at a slightly higher level for the quarter. The S&P 500 has not yet broken through its March low of about 1260, and some analysts are predicting that the index will soon test those lows.

In the coming week, investors will have little to focus on as far as earnings are concerned. Most of the focus will be on the latest batch of economic news. The Institute for Supply Management manufacturing index will be released Tuesday, and the non-manufacturing index will come on Thursday. The unemployment report will be the most anticipated release of the week, expected on Thursday.

After May's shocking jump in the unemployment rate to 5.5%, the biggest monthly increase in more than 20 years, investors are bracing for the worst. The last time the unemployment rate jumped by a half a percentage point was in 1986, when it climbed from 6.7% in January, to 7.2% in February. In March of 1986, it remained unchanged at 7.2%, and then dropped to 7.1% in April.

As far as earnings go, H&R Block, Inc. (HRB | Quote | Chart | News | PowerRating) released its fiscal fourth quarter results after the close on Monday. The largest U.S. tax preparer posted a 21% increase in full-year earnings. The fiscal fourth quarter is widely regarded as the company's most important quarter since tax season falls within it. So how do you play this earnings trade?

H&R Block's longer-term trading pattern is in the narrowing camp. Shares have narrowed their gains or losses in the regular session the day after earnings in nine of the past 15 quarters that MidnightTrader.com has tracked. The stock has widened its moves in six of those quarters. The near-term trend favors narrowing, with the stock cutting back or reversing its extended-hours performance in the following regular session during three of the last four quarters. On March 6, 2008, pre-market performance was flat with the regular session.

Also look out for quarterly results from Spectrum Control (SPEC | Quote | Chart | News | PowerRating) after the close on Wednesday. The microwave company is expected to report a 10% drop in earnings to $0.18 per share, from $0.20 per share in the year ago quarter. Shares favors a widening trend between the sessions, seeing more aggressive next day trades in five of the last nine quarterly reports. In the near-term, the stock is mixed, widening in two of the last four quarters and reversing in the other two. On March 27, 2008, shares rose 1.8% after hours, after reporting a year-over-year drop in Q1 sales and earnings. It reversed the following day, losing 2.8% by the close on March 28.

Looking deeper into Spectrum's performance between the sessions, longs are at a slight advantage following earnings-driven after-hours upside moves. In the nine quarters MidnightTrader.com tracked, shares has five times seen an evening gain following earnings, and stock has added to that gain in next-day trading in three of those events. On the short side, the trend is mixed - we've recorded four quarters where shares declined in the after-hours. The stock has twice headed deeper into the red the next day, and twice narrowed its evening move.

Cassie Guglielmo is a Senior Editor at www.MidnightTrader.com.