Look for Opportunity 05-25-2010

Cusick’s Corner
The market took a turn higher; this strong move was led by the Financial sector, XLF, off their lows of the day. One catalyst for this move may be the dovish language concerning derivatives in the latest Financial Reform Bill (including Barney Frank’s comments). This circle’s back to my comments in the Midday that you need to pay attention to the traders who were starting to troll the bottom and reel in trades. This in turn puts pressure on the shorts, catapulting the market higher into the After Hours. Here is a basic problem, trying to make sense of the irrational; I say forget that pursuit and spend your time prospecting for opportunity. Remember, the market will stay irrational longer than your solvency if you are trying to figure out why. See you Midday.

The major averages suffered losses, but finished well off session lows Tuesday. The Dow Jones Industrial Average tumbled at the open as global equity markets saw another day of volatile trading. In Asia, key stock benchmarks fell more than 3 percent in Japan and Hong Kong amid renewed worries about military tensions between North and South Korea. Meanwhile, across Europe, stocks were broadly lower due to ongoing concerns about the euro and the European Debt Crisis. Overseas market action overshadowed any domestic news of the day, which included a better-than-expected reading on consumer confidence (63.3 in April vs. 58.3 consensus). The data was largely ignored and the Dow Jones Industrial Average was around the 9,850 level midday. However, a wave of buying interest and short covering surfaced during the second half of trading and, by the closing bell, the Dow was down just 23 points, or 269 points off session lows.

Bullish Flow
Pulte Homes (PHM) saw bullish trading ahead of earnings from rival Toll Brothers (TOL) and New Homes Sales data Thursday morning. Shares finished up 20 cents to $10.86 and the top trades of the day included a bullish July 9 put – June 10 call “risk-reversal”, which traded at 10 cents, 7500X. That is, it appears that an investor bought 7,500 June 10 calls at 40 cents each and financed some of the cost by selling July 9 puts at 30 cents. This trade has a bullish pay-off chart, but considerable risk if shares fall below the $9 strike. This investor is probably willing to buy the shares at that price if assigned on the short puts.

AstraZeneca (AZN), Genzyme (GENZ), and Pfizer (PFE) also had bullish order flow.

Bearish Flow
SunPower Corp. (SPWRA) touched a new 52-week low and finished the day down 19 cents to $10.73 Tuesday. Shares have now suffered a bruising two-month 43.7 percent slide. The poor performance appears to be stirring up some bearish trading in the options market. About 13,000 puts and 2,735 calls traded in the name Tuesday. January 5 puts were the most actives. 7,500 traded and, with 99 percent hitting at the asking price, it appears that put buyers were dominating the action and bracing for a possible move below $5 by the January expiration.

Bearish flow also picked up in Men’s Wearhouse (MW), Centurylink (CTL), Hansen (HNSN).

Index Trading
Trading was relatively quiet in the index market Tuesday. The CBOE Volatility Index (.VIX) finished down 3.52 to 34.80. A total of 980,000 puts and 703,000 calls traded across all the index products. Two of the top trades were in the S&P 500 Index (.SPX). The index edged up .38 to 1074.03 and the December 1100 – December 800 put spread traded at $112.70, 10000X. That is, the investor apparently paid $190 per contract for the December 1100 puts and collected $77.30 on December 800 puts. Why would someone pay such hefty premium for a put spread? It’s likely a hedge and has a potential pay-off of $187.30 if the index tumbles to 800 or less by the December expiration.

ETF Trading
IShares South Korea Fund (EWY) lost $1.32 to $42.20 and options volume hit 7X the average daily, as escalating tensions between North and South Korea weighed on equities in the region Tuesday. In the options market, not all of the flow was bearish, however. In fact, some players appeared to be using the weakness in EWY Tuesday for bullish spread trading in the June 44 – 48 call spread, which traded more than 11,000X. It included 4,893 at the 90 cent asking price.