Market Waiting On JPM Earnings 07-14-2010

Cusick’s Corner
The market stayed in a choppy consolidation range after the release of mixed economic data and FOMC revisions on GDP. The market is waiting for JPM earnings tomorrow which are due out around 7:30am ET. One important note -- the last time both Intel and JPM Chase beat earnings was last April. The market then had hit a high and has not broken the downtrend until now, where it’s currently challenging that resistance. We are also seeing that the Euro currency, E7U10, and Gold, GCU10, are starting to move more in correlation with each other, which would be a deviation from the deviation that occurred with these two instruments during the first half of this year. Remember that tomorrow is the last day to trade European Style options like SPX, NDX, and RUT, so make sure that you manage your expiration risk. See you Midday.

Stocks finished mixed, with strong earnings from Intel (INTC) helping to offset ongoing worries about the economy. Intel added 1.7 percent and was one of 14 Dow stocks moving higher after the chipmaker late-Tuesday reported earnings that beat Street estimates and also raised its outlook for the next quarter. However, sentiment turned mixed Wednesday morning after the Commerce Department said that retail sales fell .5 percent in June, and .3 percent more than economists had expected. The Dow Jones Industrial Average traded in a narrow morning range and was flat into midday. Then, a modest wave of selling pressure surfaced in afternoon action after the release of minutes from the latest Federal Reserve meeting offered a rather grim assessment of the economic outlook. However, grim economic news is really not new information and many investors seem more focused on earnings. Consequently, stocks finished mixed. The Dow added 4 points. The S&P 500 lost .2.

Bullish Flow
Options activity picked up in JP Morgan (JPM) ahead of its earnings report, due out Thursday morning. Shares finished the day down 13 cents to $40.35 and the top options trade of the day was a block of 25,950 August 44 calls at 45 cents, which appears to be an opening buyer. Another player apparently bought a July 41 – 42 call ratio spread, 4000X. That is, they bought 4000 of the 41s at 46 cents and sold 8000 of the July 42s at 18 cents, which is a bullish short-term bet as it offers a max pay-off if shares settle at $42 before the expiration later this week. JPM will be the third Dow stock to report second quarter earnings this week. After Alcoa (AA) and Intel (INTC) both beat expectations, some investors might be taking bullish positions in JP Morgan on hopes it too will deliver strong second quarter results.

Bullish order flow was also seen in AK Steel (AKS), Monsanto (MON) and RadioShack (RSH).

Bearish Flow
Bearish spread traders surfaced in Dow Chemical (DOW) Wednesday morning. Shares of the Midland, MI chemical company finished the day up 29 cents to $27. One player in the options market was focused on the August 24 – 26 put spread, which traded about 4000X during the session. In morning trading, a block of 2000 Aug 26 puts traded at the $1.22 ask price while 2000 Aug 24 puts on the 66-cent bid. This spread, at a 62-cent net debit, might be a hedge, as it makes is best profits if the stock falls by $5 or more by the August expiration. It might also be a play on earnings which are due early August.

Bearish flow also picked up in Lorillard (LO), XL Capital (XL) and Sanmina (SANM).

Index Trading
Volume is picking up a bit in the index market heading into the expiration, but remains relatively light amid falling levels of market volatility. Since the settlement values on most indexes are computed using Friday morning stock prices, the last day to trade these products is the Thursday before the expiration. For that reason, volume often picks up mid-week. Wednesday, about 652,000 calls and 644,000 puts traded across all the cash indexes. However, while volume is picking up as the July expiration approaches, activity in the index market has been light in recent weeks. Volatility has been falling and many institutional investors, who often use index puts as portfolio protection, are reluctant to pay up for premium during a period of quiet trading and falling volatility. The CBOE Volatility Index (.VIX), which tracks the expected volatility priced into S&P 500 Index options, finished up .33 to 24.89 today, but is about 10 points below the levels seen two weeks ago.

ETF Trading
The Select Sector Technology Fund (XLK) saw some interesting trading activity after strong earnings from Intel fueled some interest in the sector. Shares of the fund, which holds all of the tech names from the S&P 500, added 13 cents to $21.93. One player made a substantial bet that the advance can continue through mid-August. In midday action, they bought 25,000 August 23 calls at 23 cents. Another block of 25,000 traded at 22 cents. So, at the end of the day, more than 50,000 had traded and, since existing open interest is only 1,750, the premium buyer appears to be taking a large new position, probably looking for a move beyond $23 (4.9 percent) by the August expiration (37 days).