4 Sectors to Continue Monitoring 07-19-2010

Cusick’s Corner
The market is trading off its worst levels after some pretty decent selling into the end of last week. That selling also got me thinking over the weekend, was it panic selling or just distribution selling? It was hard to tell because of option expiration but it did look more like distribution, especially since the economic reports were poor at best and guidance from the banks, C, BAC, and JPM was poor as well. At this stage it is worth keeping an eye on 4 sectors, XLF, XLI, XLK, and XLY, monitor their performance against a major benchmark like SPX. If there is strength in 3 out of the 4 sectors, XLI, XLY, and XLK right now are in the green, this may indicate that we could see some potential buyers this afternoon. It would be nice to see Finance get onboard as well, which could signal a challenge for resistance, 110 on SPY. See you After Hours.

Major averages are holding modest gains ahead of a busy week of economic news. The Dow Jones Industrial Average opened modestly higher Monday after a 260-point slide Friday before the weekend. However, the early rally attempt was thwarted when data released at 10:00 am ET showed the NAHB Index of Homebuilder Confidence falling to 15-month lows of only 14 in June. Economists were looking for a decline to 16, unchanged from the month before. The disappointing numbers hold a bit more sway than normal because Housing Starts data is due out tomorrow and Existing Home Sales on Thursday. Meanwhile, investors are bracing for this week’s busy earnings calendar, which includes reports from tech heavyweights IBM and Texas Instruments after the closing bell. The Dow Jones Industrial Average is up 22 points in cautious trading. The CBOE Volatility Index slipped .10 to 26.15. Overall volume is about typical levels. 3.9 million calls and 2.9 million puts traded through 12:30 ET.

Bullish
Large blocks of October calls traded on Halliburton (HAL) after the oil driller reported a 52-cent per share quarterly profit, which easily surpassed analyst estimates of 37 cents. Shares added $1.35 to $28.86 on the news and the top trade is a seller of 20,000 October 26 calls at $4.10. It probably closes out a position opened on June 15 when the stock was around $25 and 20,000 contracts traded at $2.43. This strategist also bought October 28 and 30 calls. Therefore, when all is said and done, it looks like they banked a hefty profit in the 26 calls, which are $2.86 in-the-money, while taking bullish positions in the 28 and 30 call options.

Bullish trading continues in Electronic Arts (ERTS). As mentioned in Friday’s Wrap, January 20 calls saw interest Thursday and August 16 call options were busy on Friday. Shares are up 13 cents to $14.92 and the focus is again on the August 16 call options. More than 14,000 contracts had traded through midday. Like Friday, the bulk of the activity (65 percent) is at the offer, suggesting buyers are still dominating the flow. The bullish trading comes ahead of earnings, expected in the next few weeks.

Bearish
Two of the top trades so far today are in the iShares Russell 2000 Small Cap Fund (IWM). Shares are down 31 cents to $60.91 amid relative weakness in the small cap asset class Monday. Meanwhile, one player seems concerned about additional weakness in the third quarter and bought the September (Quarterly) 60 – 55 put spread at $1.70, 20000x in midday trading. That is, they bought 20,000 of the September 60 puts at $3.52 and sold 20,000 of the September 55 puts for $1.87. It’s probably an institution looking for a hedge, as this spread makes its best profits if the Russell 2000 Small Cap Index falls about 10 percent from current levels.

Put volume is picking up in Western Digital (WDC) ahead of the storage device maker’s July 21 profit report. Shares lost 5 cents to $31.40 and the focus is on the August 31 – 27 put spread. One player apparently bought it at $1.15, 970X. The spread has now traded 2,300X and looks like cautious or bearish action ahead of the earnings release.

Unusual Volume Movers
SPDR Homebuilder Trust (XHB) options volume is running 3X the usual, with 44,000 contracts traded and call volume accounting for about 95 percent of the activity.

Weatherford (WFT) options activity is running 2X the usual, with 31,000 contracts traded and call volume representing 94 percent of the volume.
Apollo Group (APOL) options volume is running 3X the usual, with 30,000 traded and call volume representing 80 percent of the activity.

Unusual volume is also being seen in Corning (GLW), Electronic Arts (ERTS), and Eastman Kodak (EK).

Implied Volatility Movers
Apple Computer (AAPL) implied volatility is higher, as iPhone 4 antenna woes and pre-earnings jitters weigh on the share price Monday. Apple is due to release results Tuesday after the close of trading. Shares are down $7.79 to $242.11. Options trading remains brisk. 134,000 calls and 109,000 puts traded so far today. Meanwhile, implied volatility is up 9 percent to 46.5, from about 40 a week ago.