Volume Weak 05-27-2010

Cusick’s Corner
This was a nice move to the upside, but a key component was missing -- volume. Today’s upside move had very little volume support, probably due to lack of fund buying. This is contradictory to recent downside moves which had very strong volume, most likely due to fund distributions. Keep a close eye on the volume going into the long weekend (plus it’s end of month) to see if we get better guidance on market sentiment. There is a lot of data due out tomorrow, starting with Personal Income and Spending along with PCE Prices data at 8:30am ET, followed later by UofM at 10:00am ET.

Major averages rallied on easing concerns about the European Debt Crisis Thursday. European equity markets and the euro bounced before the exchanges opened in New York after China assured investors that it wasn’t planning on selling European debt. The comments from the agency, which controls $2.5 trillion in foreign exchange reserves, comes the day after Financial Times warned that China might be looking to unload European debt, which would signal a lack of confidence in eurozone policy-makers. Benchmarks across Europe rallied on China’s reassuring words and the euro rallied beyond 1.235 against the buck (up from 1.225 in morning action). The domestic news wasn’t so bright. Economic data released early showed first quarter GDP up at an annual rate of 3 percent, and below economist estimates of 3.3 percent. Separate data showed jobless claims down 14,000 to 460,000 last week. Economists were looking for a bigger drop, to 455,000. Yet, with European markets up and the euro rebounding, the data didn’t seem to matter much. The Dow Jones Industrial Average finished another volatile session up 285 points and near session highs. The NASDAQ added 81.8.

Bullish Flow
Yahoo (YHOO) shares added 24 cents to $15.69 and has been holding steady over the past two days. The Internet giant offered an update at an analyst meeting yesterday. While the event didn’t do much for the stock price, one investor appears to have adopted a bullish view on YHOO for the next seven months. In morning trading, a risk-reversal was initiated in Yahoo after a strategist bought 4746 January 17.5 calls at $1.16 and sold 4746 January 14 puts at $1.32. Both blocks traded on the ISE, where ISEE sentiment indicate the call side of the risk-reversal is an opening customer buyer. If so, they collected 16 cents net (X4746) and are looking for YHOO to hold above $14 (put strike) and perhaps rally beyond the breakeven at $17.34 (call strike minus credit) through the January expiration.

Bank of New York (BK), Regions Financial (RF), and NCR also had bullish order flow.

Bearish Flow
Walgreens (WAG) saw an unusual increase in put activity Thursday. Shares gained 32 cents to $32.34 and total options volume rose to 3.5X the recent average daily. About 19,000 puts and 2,720 calls traded. June 31 puts were the most actives. 8,200 contracts traded, compared to 427 contracts in open interest. Another 7,060 July 31 puts changed hands, compared to 1,910 contracts of open interest. While not all of the action was put buying, some premium sellers were visibly opening positions as well. The overall flow seems somewhat cautious or bearish. There was no news on the retailer to explain the action. The company is due to report May sales results on June 3 and earnings on June 22.

Bearish flow also picked up in NetApp (NTAP), Endo Pharmaceuticals (EDP), and Cheesecake Factory (CAKE).

Index Trading
The CBOE Volatility Index (.VIX) fell, even as market volatility remained high Thursday. Although the S&P 500 posted a gain, the 35-point move represents another very volatile trading session for the equity market. Today, the 20-day actual or statistical volatility of the S&P 500 Index (.SPX) is roughly 30 percent. Since VIX tracks the expected volatility of the SPX, a reading around 30 makes sense given the big market moves lately. That is, if the VIX is substantially higher than SPX actual volatility, it might be too high. On the other hand, if the volatility index falls substantially below actual volatility, it might be too low. The index fell 5.34 to 29.68 Thursday and is now not far from the 20-day actual volatility of 29.9 percent.

ETF Trading
What is going on with the Select Sector Technology Fund (XLK)? The fund, which holds all of the technology names from the S&P 500 Index, is seeing large bullish spreads almost daily. Shares rallied 72 cents to $21.82 and, in morning trading, the June 23 – 24 call spread was bought at 9 cents, 25000X. By the end of the day, more than 45,000 had traded. Similar action was seen Wednesday, when 20,000 traded at 8.5 cents. These look like bullish short-term bets, as it requires a move towards $23.09 in XLK shares to breakeven at expiration, which is now 15 trading days away (21 calendar days).