Impressive Bounce 06-17-2010

Cusick’s Corner
An impressive bounce occurred today after the market had been pounded down, resulting in all the indices finishing the day on the positive side. When you see moves like this, you want to see the market retake support, 1110 on the ESU10. Do not forget that tomorrow is expiration, a quarterly nonetheless, so if you are trading make sure that you are trading in a disciplined manner and manage your expiring trades very carefully -- odd things can happen during these quarterly expirations.

The major averages battled back from losses and finished with modest gains Thursday. The Dow Jones Industrial Average wavered in early morning trading after data showed rising jobless claims last week and falling consumer prices in May. Then, two additional economic reports released at 10:00am ET also fell short of expectations. The May List of Leading Economic Indicators rose .4 percent in May, which was less than the .5 percent increase that economists had expected. The Philadelphia Fed Manufacturing Survey plummeted to just 8 in June, down from 21.4 in May and significantly below economist estimates of 20.0. Stocks were broadly lower into midday on the news and then choppy trading ensued. However, stocks rallied in the final hour, with a rebound in the euro seeming to help keep a floor under the major averages. The European currency made a run back towards 1.24 against the buck following news of a successful auction of Spanish 10-year bonds. Maybe the options expiration is affecting trading as well? For whatever reason, stocks strengthened in the final hour and the Dow Jones Industrial finished up 25 points, up 115 from its worse levels of the day.

Bullish Flow
Silver Wheaton (SLW), a Vancouver based mining company, finished the day up 44 cents to $20.75 amid strength in the sector after silver gained 30 cents to $18.75 Thursday. Options action in SLW hit 2.5X the recent average daily, with 21,000 calls and 4,330 puts traded in the name. The top trade was a June 16 – July 16 call spread, bought at 15 cents, 4,050X. It appears that this investor sold-to-close a position in in-the-money June calls ahead of this week’s expiration, and then bought an extra month of bullish exposure by purchasing the July 16 calls.

Bullish order flow was also seen in Cirrus Logic (CRUS), AMAG Pharmaceuticals (AMAG), and Pan America Silver (PAAS).

Bearish Flow
Retailer Williams Sonoma (WSM) shares fell $1.68 to $26.90 and put options saw an uptick in activity Thursday. 3,165 contracts traded, which is twice the normal and compares to just 140 puts. Data indicate that customers were buying to open new positions July 30 puts. 2,275 traded on the day. There was no company specific news to explain the relative weakness in the stock or the increasing interest in WSM puts. It might reflect concerns about recent sales and revenues following several days of disappointing economic news.

Bearish flow also picked up in Career Education (CECO), DeVry (DVY), Royal Caribbean (RCL).

Index Trading
Trading was unusually slow in the index market heading into the options expiration. The Thursday before expiration is often very busy for the index market because settlement values are computed using Friday morning prices. As a result, the last day to trade these products is the Thursday before expiration. However, about 540,000 calls and 493,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is about 71 percent the recent average daily levels. Some investors might be opting to exercise their in-the-money puts rather than offset them, which could explain the lower volume. Meanwhile, volume might be lighter because volatility has been easing a bit as well. The S&P 500 added just 1.4 points and the CBOE Volatility Index (.VIX) fell back .87 to 25.05.

ETF Trading
IShares FTSE Xinhua China Index Fund (FXI) lost 48 cents to $40.62 and options volume hit 3X the average daily, with 172,000 puts and 99,000 calls traded on the exchange-traded fund. Some investors appear to be bracing for heightened volatility in China’s equity markets. For example, one of the top trades of the day was a block of 20,000 August 37 puts at the $1.03 asking price, which appears to be a buyer. The July 40– July 41 strangle (40 puts and 41 calls) saw interest as well, with more than 20,000 traded.