Market Bounces Back 05-17-2010

Cusick’s Corner
The market recovered nicely going into the afternoon, might be a fundamental change in mind set or maybe just a squeeze going into options expiration week. Energies were the buoy today, with Oil bouncing and Materials making up their earlier session lows. While this is not to be taken as any long-term upswing, let’s see if we cannot get a squeeze going into tomorrow’s midday. Watch the pre-market -- Housing and PPI data due out at 8:30am ET. See you Midday.

The stock market averages battled back from morning losses and finished with modest gains Monday. Stock index futures fell into the red pre-market on news the NY Empire State Manufacturing Index sank to 19.11 in May, down from 31.86 in April and much worse than the 30 reading that economists had expected. The major averages did open a bit higher despite the data, but then another wave of selling pressure surfaced mid-morning. Persistent worries about the European Debt Crisis also weighed on early trading. However, stocks came off morning lows with help from a rebound in the euro and better than expecting housing numbers. The euro had made a run towards 1.23 against the buck, but was up to 1.2391 in afternoon hours and up from 1.281 late Friday. Meanwhile, the major averages also found some strength after the National Association of Home Builders said its housing market index rose to 22 in May from 19 in April, beating economists’ forecasts. At the end of the day, the Dow Jones Industrial Average was up 6 points on the day and 190 points off session lows.

Bullish Flow
A number of education stocks saw late day strength Monday. Career Education (CECO) was one of them. Shares saw a high volume spike in the final hour and finished the day up $2.83 to $31.66. Increasing options action accompanied the move higher. 12,000 calls and 1,700 puts traded. May 31 calls were the most actives. 3,100 contracts traded and, with about two-thirds trading at the asking price, the action was apparently driven by premium buyers. There was no company specific news to explain the action, but it appears to be a sector play because a number of other education stocks saw increasing volume and late day spikes as well.

Corinthian Colleges (COCO), Devry (DV), and Apollo Group (APOL) also had bullish order flow.

Bearish Flow
XL Capital (XL), a property and casualty insurance company, lost 15 cents to $18.65 and options activity picked up Monday. More than 9,000 puts and 1,800 calls traded in the name. January 17.5 puts saw the most action. 4,170 contracts traded and, of that, 99 percent traded at the asking price. October 17 puts traded 1,950X. There was no news on the stock, but the increasing interest in puts at the 17 and 17.5 strike prices seems like bearish trading, or maybe hedging, on concerns about weakness in the share price during the months ahead.

Bearish flow also picked up in Staples (SPLS), American Axle (AXL), and Advanced Auto Parts (AAP).

Index Trading
The CBOE Volatility Index (.VIX) hit a high of 35.25 and finished down .40 to 30.84 Monday. Like Friday, large blocks of May and June calls traded on the index. In Monday’s spread, a block of 50,000 May 32.5 calls traded at $2.29 cents while another block of 50,000 June 37.5 calls traded at $2.79 per contract. This spread looks like a position adjustment, where the strategist is selling to close a position in May to open a similar one in June. VIX May options contracts expire Wednesday and this strategist appears to be banking profits ahead of the expiration, then looking for additional gains in the VIX from now until June.

ETF Trading
Call volume picked up in the Select Sector Technology Fund (XLK) for a second day. Shares of the exchange-traded fund, which holds all of the technology names from the S&P 500, hit a morning low of $22.07, but finished the day up 11 cents to $22.52. Options volume hit 11X the average daily, driven by buying of June 24 calls. More than 86,000 contracts traded and 95 percent of the volume was at the asking price. Similar action was seen Friday and the activity created more than 30,000 contracts of new open interest in the June 24 call options.