Downward Slope Still in Place 07-16-2010

Cusick’s Corner
The market affirmed today that the downward slope is still in place with no bounce into the After Hours. Folks, this is a traders market. This move today was based on higher volume and involved a larger number of sectors on the downside. We again want to see if the 1050-1040 levels are held. Some technical homework for the weekend -- take a look at the SPY chart and see how this week did not break that 110-113 range, but pulled back into earnings and is holding the key levels mentioned above. Check if you can spot any road map that could pull us off these current lows and potentially get a leg to the upside that will challenge our April highs. See you Midday and have a great weekend.

Another day of grim economic news, a round of mixed earnings reports, and some expiration-related volatility resulted in substantial losses for the major averages Friday. Shares of Bank of America (BAC) fell more than 9 percent and were the biggest losers in the Dow Jones Industrial Average after the bank early Friday posted stronger-than-expected quarterly profits, but revenues fell short of expectations. Citi (C) and Google (GOOG) also fell on earnings news and then the market’s early losses were extended in morning trading when a report from the University of Michigan showed its index of Consumer Confidence falling to only 66.5 in July, down from 76 in late June and much worse than the 74.5 reading that economists had expected. The Dow Jones Industrial Average fell on the data and never recovered. By the closing bell, the Dow had lost 261 points and given up 1 percent for the week.

Bullish Flow
Electronic Arts (ERTS) has seen two days of increasing call volume. On Thursday a block of 11,316 January calls at the $20 strike traded. Total open interest in the contract increased by more than 12,000 and, at 95,262 contracts, the Jan 20 call option is by far the biggest position in the video game maker. While on Friday the shares lost 70 cents to $14.79 and another 20,000 calls changed hands which compares to 2,350 puts. The attention shifted to the August 16 calls, which traded 15,190X, and included a series of lots at the 39-cent asking price. September 16 call options saw interest as well. There’s no news to explain the recent action and some investors might be building bullish positions in anticipation of a rebound and or it might be a play on earnings, which are due out in early August. The stock is down about 26 percent since late-April.

Bullish order flow was also seen in Goldman Sachs (GS), Ford Motor (F), and ON Semiconductor (ONNN).

Bearish Flow
Annaly Capital Management (NLY), the New York-based Diversified REIT, lost 12 cents to $17.50 and options volume rose to 2X the average daily Friday, with 34,000 puts and 2,560 calls traded on the session. The top trade of the day was a buyer of 13,300 August 14 puts at 7 cents per contract. At the end of the day, 19,688 contracts traded, vs. open interest of only 1. These options are cheap because they are more than 25 percent out-of-the-money and expire in five weeks. It might be an investor looking to buy cheap “disaster insurance” to protect a position in NLY shares.

Bearish flow also picked up in Lorillard (LO), Dicks Sporting Goods (DKS), and Safeway (SWY).

Index Trading
The Mini-NASDAQ 100 Index (.MNX) is equal to 1/10th of the NASDAQ 100, which is a market value weighted index of the top 100 non-financial NASDAQ stocks. It was a rough day for the tech-heavy NASDAQ and MNX lost 5.27 points to 180.35. Options volume in the index hit 3.5X the average daily, led by an apparent buyer of September – December 180 put spreads at $5.40, 4500X on PHLX. That is, it looks like the investor bought 4,500 of the December 180 puts at $13 and sold 4,500 of the September 180 puts at $7.60. If so, this calendar is a neutral strategy, as it makes its best profits if the index holds near currently levels at $180 through the September expiration.

ETF Trading
A substantial straddle traded in the SPDR Healthcare Fund (XLV) Friday. XLV is the exchange-traded fund that holds all of the healthcare names from the S&P 500 and finished the day down 61 cents to $28.68. One strategist apparently bought September 29 puts and calls at $2.00 even, 22800X in midday trading. In contrast to the calendar spread (see Index Trading), this long straddle is a bet that volatility will continue through mid-September and XLV will make a substantial move in one direction or the other.