Inverted Hammer-time Remix 06-10-2010

Cusick’s Corner
As I wrote on June 8th, typically the market action of late can generally be described as some small buying on lows, followed by a market recovery and then the market usually just gets pounded at the end of the day. Well, not today. The market actually ended on an upswing. As mentioned in the Midday, there was an Inverted Hammer in the SPX yesterday – and to confirm it today, the SPX closed higher than yesterday’s candle body. This shorter-term trend in the SPX appears bullish to many technical traders, but have to keep in mind that today’s action was on rather weak volume today. Retail sales for May are coming out tomorrow at 8:30am ET. See you Friday.

Stocks surged on positive developments overseas Thursday. European markets were led higher by a 2 percent gain in France’s CAC 40 and with help from the strengthening euro, which rallied back towards 1.215 against the buck. Global equity markets also rallied around news that China’s exports surged 48.5 percent and imports rose 48.3 percent in May. The day’s domestic news was mixed. Data released before the opening bell showed weekly jobless claims falling by 3,000 to 456,000 in the period ended June 5. Economists were expecting a larger drop, to 450,000. Meanwhile, a separate report showed April trade balance at to $40.3 billion, from $40 billion in March and better than the $41.3 billion economists had expected. Nevertheless, given that stocks have been pounded in recent months on worries about the European Debt Crisis, the rebound in the euro overshadowed most of the other news. The volatility continues and the Dow Jones Industrial Average settled the day up 274 points.

Bullish Flow
Saks (SKS) shares added 37 cents to $8.45 and options volume picked up in the retailer’s July 10 call options Thursday. A total of 5,825 contracts traded, and significantly more than the 68 contracts of existing open interest. The activity included several lots at the 15-cent asking price, and appears to be call buying in anticipation of a rally beyond $10 through the July expiration. However, the top trades of the day were decidedly different, as one investor sold 3,200 January 7.5 straddles (puts and calls) at $3 even, 3300X. This trade was tied to a block of SKS shares at $8.22 and seems to reflect expectations for range bound trading in the stock during the months ahead.

Bullish order flow was also seen in Discover Financial (DFS), ARM Holdings (ARMH), and Harley Davidson (HOG).

Bearish Flow
BP shares rose $3.58 and bounced back after falling more than $5 on bankruptcy concerns the day before. The oil giant said it does not know why shares fell so much Wednesday, but admitted that it has lost about $1.43 billion due to oil spill. Volatility remains high and options action is still brisk, with another 392,000 puts and 223,000 calls trade din BP. The top trade of the day was in the July puts after an investor bought 8,000 July 25 puts and sold 16,000 July 12.5 puts, creating a bearish 1X2 put ratio spread with a max pay-off if shares fall to $12.50 by the expiration.

Bearish flow also picked up in Micron Technology (MU), Covanta (CVA), and Altria (MO).

Index Trading
The Mini-NASDAQ 100 Index (.MNX) saw more volume than usual. The index is equal to 1/10th of the NASDAQ 100 Index (.NDX), which is an index of the top 100 non-financial NASDAQ stocks. Total options volume rose to more than twice the average daily after 11,000 calls and 2,850 puts traded on the index. The action included a March 2011 – June 2011 call spread, bought at $2.20, 2000X (bought Junes and sold March). Why would a strategist implement this type of “time” or “calendar” spread? It might be a roll of calls from one expiration to the next. Or, it might be a bet that the index will hold below 215 through the March expiration and then rally from that point forward, through June 2011. MNX finished the day u p5.12 to 183.01.

ETF Trading
Select Sector Financial ETF (XLF), which holds all of the financial names from the S&P 500, finished up 46 cents to $14.47 and notable trading activity was seen in the July 14 puts. One player paid 61 cents per contract for 26,000. By the end of the day, 67,850 contracts had changed hands. The activity looks like put buying and probably some institutional investors hedging their exposure to the financial sector ahead of news on regulatory reform in the industry. A congressional panel is expected to conclude its work on financial reform in about two weeks.