Earnings Peer Pressure 07-29-2010

Cusick’s Corner
With no leadership, XLF & SMH down, plus the Euro currency stuck in the mud, the market had really no catalyst to help any upside advance into the After Hours. Commodities, DBA (ETF w/ Corn, Soybeans, Wheat, and Sugar) continue to move to the upside, and while this could be potentially looking a little tired, those who missed this rally off the June lows may look to nibble on a pullback. In this earnings environment it is worth monitoring the peers that report in a sector that you are following. For example, in Semis, SMH, there was interesting put activity in the midst of the sector pullback and over 15K puts traded today in Xilinx (XLNX). This is interesting activity because one of its peers, KLA Tencor (KLAC), reports tonight and there is a strategist who might be seeing some potentially negative sentiment. This could be reinforced if peers are releasing negative results in front of your stock, potentially trickling down. Worth keeping an eye on the option action and their peers to get a potential heads up. See you Midday.

Thursday was a bit of a roller-coaster ride, as the Dow Jones Industrial Average opened higher, fell into midday, battled back to higher ground by early-afternoon, and then slipped back into the red during the final hour. The tone of trading was positive early after the Labor Department said that jobless claims fell by 11,000 to 457,000 in the week ended July 24. Economists were looking for a smaller drop, of 4,000. The day’s earnings news was mostly upbeat as well, with Sony (SNE), Avon Products (AVP), Southwest Airlines (LUV), and Dow component Exxon Mobile (XOM) out with better-than-expected results. Yet, the industrial average was down as much as 110 points by midday. Then, a wave of buying interest surfaced to push the Dow back into positive territory in afternoon action. However, the gains didn’t last and, at the closing bell, the Dow had lost 31 points. The NASDAQ was down 12.9. The CBOE Volatility Index (.VIX) slipped .12 to 24.13.

Bullish Flow
An impressive spread trades in Transocean (RIG) Thursday. Shares of the oil driller added 62 cents to $47.39 and one investor sells 30,000 February 65 calls and buys 15,000 of the February 55 calls and 15,000 February 80 calls. This call butterfly spread was bought at a $3 debit and is an aggressive trade on RIG. It makes its best profits if shares rally to $65, or 37.2 percent, through the February 2011 options expiration. Separately, another investor (or maybe the same) was active in November calls – buying 19,500 November 45 calls, selling 19,500 November 55 calls, and buying 9,750 November 65 calls. Like the butterfly, this spread targets the middle strike, or $55 per share by the November expiration.

Bullish order flow was also seen in Marvel Technology (MRVL), Range Resources (RRC), and Pactiv (PTV).

Bearish Flow
Oracle (ORCL) shares came under fire late Thursday on headlines the software maker is being sued by the Department of Justice for alleged software contract fraud. Shares, which had traded towards $24.25 early, finished the day down 58 cents to $23.70. In the options market, trading activity picked up as well, with 40,000 puts and 11,000 calls traded in the name. August 23 puts were the most actives, with 14,789 traded. About 80 percent of those puts traded at the Ask and so it appears that skittish investors were buying puts on concerns about additional weakness for Oracle shares in the weeks ahead. August 24 puts traded 13,800X.

Bearish flow also picked up in Akamai (AKAM), MetLife (MET), and Prudential (PRU).

Index Trading
At risk of sounding like a broken record, volume remains very light in the index market. There’s not much to write about. Approximately 218,000 calls and 315,000 puts traded across the S&P 500 Index (SPX) and other cash indexes Thursday, or 53 percent the recent average daily volume. Many institutional investors, who drive a lot of activity in the index pits when they use index puts to hedge portfolios, are on vacation this time of year. In addition, August is sometimes a quiet month for financial markets and portfolio managers are less motivated to buy index puts when expectations are for quiet trading. However, that might soon change. September and October are historically the most volatile months for the equity markets.

ETF Trading
iShares FTSE Xinhua China Fund (FXI), which holds shares in a number of Chinese companies, finished the day down 9 cents to $41.09 and a bearish trader surfaced in the exchange-traded fund Thursday morning. The investor bought 15,600 August 40 – 38 put spreads at 35 cents and sold 15,600 August 43 – 45 call spreads at 24 cents. The spread, at an 11-cent net debit, offers a $1.89 pay-off (excluding commissions) if shares fall to $38 or less by the August expiration (22 days). The risk is $2.11, plus commissions, if shares rally beyond $45 during that time.