Small-Caps, Mid-Caps, & Commodities Hitting 200 MA Resistance 07-27-2010

Cusick’s Corner
The market started to hit some resistance into the close, plus commodities have stalled. This is a development because along with small and mid-caps, commodities like Copper, JJC are hitting strong resistance on the 200-Day Moving Average [MA]. If there is little to no follow through, this could be a potential road block for the equities to continue to rally. Watch the Crude Inventories, due out at 10:30am ET, which could also put pressure on equities as well. Gold is on the break to the downside, testing its 200-Day MA -- keep an eye to see if support kicks in. See you Midday.

Stocks finished mixed on a day of quiet market action Tuesday. Earnings were again in focus and DuPont (DD) was the day’s best gainer in the Dow Jones Industrial Average after the chemicals company reported better-than-expected quarterly earnings and raised its future guidance. Shares finished the day up 3.6 percent. The major averages also seemed to find some support early Tuesday after UBS and Deutsche Bank reported strong results in Europe. A report on consumer confidence seemed to weigh a bit in midday trading after the Conference Board said its index of consumer sentiment fell to 50.4, down from 54.3 in June and below economist estimates of 51. Yet, with the earnings-reporting season in full swing, the economic data didn’t do much and the market action remained mixed into the close. At the closing bell, the Dow Jones Industrial Average was up 13 points. The NASDAQ had lost 8.

Bullish Flow
Alcoa (AA) lost 2 pennies to $11.02 and noteworthy trading was seen in the aluminum maker’s January 12.5 call options. The top trades were two blocks of 10,000 at 73 and 74 cents, when the bid-ask was 72 to 74 cents, and appears to have been initiated by a call buyer. Several other blocks also traded at 73 and 74 cents. At the end of the day, volume had swelled to 53,430 contracts. These investors might be buying the calls in anticipation of a move higher through yearend. AA has had a rough 2010 so far, down 36.3 percent from its mid-January highs. By purchasing the January 12.5 call options, these bullish investors are assured the right to buy the stock at $12.5 through the January 2011 expiration, even if shares rebound back to January 2010 highs near $18 per share.

Bullish order flow was also seen in Sprint (S), Xerox (XRX), and MGM.

Bearish Flow
International Rectifier (IRF), the El Segundo, CA chipmaker, finished down 4 cents to $20.19 and put options were busy for a second time in three days. Friday, about 1,000 August 20 puts traded. Volume picked up again Tuesday. This time, 1,661 August 20 puts changed hands. In addition, 2154 December 20 puts and 672 December 22.5 puts also traded. Total volume was 4527 puts and 156 calls, which is 26X the average daily volume for IRF. The top trade was a lot of 400 Aug 20 puts at 70 cents on ISE, which was an opening customer buyer, according to sentiment data. Indeed, with more than 80 percent of the puts trading at the Ask and implied volatility up 5 percent to 40.5, it appears that put buyers were dominating the action and bracing for possible weakness in IRF shares in the weeks ahead. No news on the stock to explain the action. It might be a play on earnings due mid-to-late August.

Bearish flow also picked up in Genzyme (GENZ), Juniper Networks (JNPR), and CNinsure (CISG).

Index Trading
Overall index options volume remains light, with 344,000 calls and 496,000 puts traded on the S&P 500 Index (.SPX) and other cash indexes Tuesday. The volume represents about 83 percent the recent average daily. The major averages are trading in a narrow range and volatility remains light, which is not unusual during the peak period of the earnings reporting season. Basically, companies that report strong results move higher, and those that fail to live up to expectations, move lower. The result is mixed market action like today. The S&P 500 trading in an 11-point range and finished down 1.2 points. In this environment, institutional investors are less likely to buy index puts to protect portfolios and that helps explain the low volume in the index market. Meanwhile, the CBOE Volatility Index (.VIX) edged up .46 to 23.19 and is seeing quiet action as well.

ETF Trading
An interesting spread traded in the Market Vectors Miners ETF (GDX) late Tuesday. Shares finished down $1.80 to $47.09 after August gold plummeted $25 to $1158 an ounce. The interesting trade is a diagonal call spread after an investor sold 15,000 September 51 calls at 80 cents and bought 15,000 December 55 calls at $1.22. This spread, at a 42-cent net debit, might be a roll of calls from September to December (and up 4 strikes). Or, it might be a bet that GDX will stay below $51 through September expiration and then see a strong rally, beyond $55, during the final three months of the year.