Finicky Market 07-22-2010

Cusick’s Corner
Today’s market is for the bulls, yesterday was for the bears, and this market is getting more finicky than a cat. Tech and Transports are the leaders going into this rally, which was sparked in the pre-market after T, QCOM, and UPS all announced blockbuster earnings. With the market not having a clear predisposition on short-term trend, I would keep your powder dry until there’s a trend with strength. Watch the trendline down since the end of April, if this can be broken and hold, 1085 on the SPX, we could see some momentum to the upside. See you After Hours.

Stocks are trading broadly higher with help from strong economic numbers. Stock index futures rallied overnight after data out of Europe showed better than expected readings from purchasing managers and industrial orders. The domestic news was mixed. While the latest weekly jobless claims numbers showed an increase of 37,000 to 464,000, and double the increase that economists had expected, separate data showed a smaller than expected decline in June existing home sales. Total sales fell to an annualized rate of 5.37 million, from 5.66 million in May and much better than the 5.09 million economists had expected. The earnings news was mostly positive as well, with a number of high profile names, including EBAY, Qualcomm (QCOM), and Caterpillar (CAT), getting a lift on their respective results. Through midday, the Dow Jones Industrial Average is up more than 200 points. The CBOE Volatility Index (.VIX) lost 1.48 to 24.16. Options action is brisk, with about 4.35 million calls and 3.45 million puts traded through 12:30 ET.

Bullish
Alcatel-Lucent (ALU) is up 13 cents to $2.71 and options volume is running 7X the average daily. No news on the stock and the focus is on December 2.5 put options. Almost 44,000 traded so far. 69 percent of the action traded bid-side and open interest is currently 44,200. It appears to be put sellers dominating the action and possibly liquidating positions as shares move higher Thursday.

Netflix (NFLX) fell on earnings, but at least one investor seems to see the drop as an opportunity for bullish trading. NFLX is down $12.63 to $107.02 after the company reported a quarterly profit of 80 cents per share, which was 9 cents better than analyst estimates. However, revenues missed expectations and the company offered only in-line guidance for the next two quarters. Shares are down on the news, but one player seems to have initiated a bullish 1X2 risk-reversal, by selling 1373 Jan 120 puts at $24.10 and buying 2,549 Jan 145 calls at $4.30.

Bearish
Express Scripts (ESRX) is down $1.91 to $43.30 and moving lower in sympathy with peer Medco Health Solutions, which is off $2.80 to $50.53 on disappointing earnings news. ESRX options volume is running 4X the average daily, with 12,000 calls and 8,800 puts traded through midday. The August 45 calls are the most actives, with 3758 contracts traded. Several lots traded on the bid in morning action, suggesting call writers were dominating the action. Implied volatility is up 8 percent to 39, as investors now brace for ESRX to report earnings on July 28.

Gerdau Ameristeel (GNA) with several days of put buying. Shares are up 2 cents to $10.97 and March 10 puts are seeing action, with several blocks traded on the 5-cent asking price in morning action. 4,500 changed hands so far. Monday and Wednesday the action was in the September 10 puts, where open interest has mushroomed to almost 22,000 contracts. The company is being acquired by Gersau SA and these put buyers are probably hedging their bets should the deal fall apart.

Unusual Volume Movers
CBOE Volatility Index (.VIX) options volume is running 2X the usual, with 375,000 contracts traded and put volume accounting for about 56 percent of the activity.

Qualcomm (QCOM) options activity is running 2.5X the usual, with 165,000 contracts traded and call volume representing 80 percent of the volume.
UPS options volume is running 3X the usual, with 48,000 traded and call volume representing 58 percent of the activity.

Unusual volume is also being seen in Blackstone (BX), Safeway (SWY), and Xerox (XRX).

Implied Volatility Movers
Cephalon (CEPH) shares are down $1.54 to $59.49 and among the biggest losers in the NASDAQ 100 Thursday. No news to explain the relative weakness, but options volume is running 10X the average daily as well. 8940 puts and 3960 calls traded on the biotech so far. Meanwhile, implied volatility has risen 12.5 percent to 35.5.