August Opens Strong Like Bull 08-01-2010

Cusick’s Corner
August opened strong by taking the bull by the horns and taking it for a ride. All the major indices closed in the green. While the After Hours did have further upside, this move was grinding and rather uneventful. The market was focused on continuing this uptrend, breaking upside resistance of 1120 on the S&P. Keep an eye on option activity in front of key economic data. For example, apparently there was a roll in XHB (SPDR Homebuilders ETF), strategist rolled the AUG 15 calls up to the AUG 16 calls, potentially locking in some profit and reducing premium risk by buying the lower cost 16 calls. This is also how you could proactively take profits while repositioning to potentially take advantage of (in this case) an upside continuation move. See you Midday.

Wall Street followed European benchmarks higher early Monday and the gains were extended with help from stronger-than-expected economic data and rallying crude oil prices. Major averages finished between 2.5 and 3 percent higher in major markets across Europe after HSBC (HBC) and BNP Paribas posted strong earnings. The early advance in the US picked up additional steam after the ISM Index of manufacturing activity printed at 55.5 in July; which was down from 56.2 the month before, but not as bad as the 54.2 reading that economists had expected. Separate data showed Construction Spending up .1 percent in June, from negative 1 percent in May and better than the .8 percent drop that economists had predicted. Meanwhile, Exxon Mobile (XOM) shares jumped 3.8 percent and were among the best gainers in the Dow Jones Industrial Average after crude oil bubbled $2.53 higher to $81.58 a barrel. In fact, all thirty Dow stocks finished with gains and the industrial average added 208 points on the session. The NASDAQ gained more than 40.

Bullish Flow
Pfizer (PFE) is a name worth watching Tuesday morning. The pharmaceutical maker is a component of the Dow Jones Industrial Average and will release results before the opening bell. Shares finished up 48 cents to $15.48 ahead of the news Monday and options volume hit 2.2X the average daily, with 137,000 calls and 35,000 puts traded on the session. Seems that sentiment was somewhat bullish ahead of the results. 42,400 August 15 calls changed hands. Another 36,580 August 16 and 21,640 September 15 call options also traded ahead of the earnings results. Some investors were likely buying these short-term out-of-the-money calls as a cheap way to play the stock on earnings. Others might have closed out positions ahead of the news, as significant open interest already exists in those contracts.

Bullish order flow was also seen in Staples (SPLS), Ford Motor (F), and Dollar Thrifty (DTG).

Bearish Flow
Xerox (XRX) saw a noticeable uptick in put activity Monday. Shares added 8 cents to $9.82 and are up nearly 17 percent since the company reported earnings on July 22. Some players might be looking to lock-in some of the recent gains. 15,000 September 9 puts changed hands. The top trade was a block of 10,657 at the 21-cent Asking price. Most of the day’s other trades were in smaller lots at 20 and 21 cents. In the end, the action seemed somewhat defensive and reflecting concerns about a move back below $9 per share between now and September.

Bearish flow also picked up in Verisign (VRSN), UPS, and Frontline (FRO).

Index Trading
The CBOE Volatility Index (.VIX) continued its slide during the first day of August. The market’s fear gauge fell to 23.5 from 34.54 during the month of July and slid another 1.49 to 22.01 on the first day of trading in August. The decline in the VIX comes amid declining levels of market volatility and relatively low volume in the index market. However, activity picked up a bit in the VIX options pits Tuesday, with 175,000 puts and 117,000 calls traded on the volatility index. Two of the top trades were in the October 24 – 26 call spreads after one strategist sold the spread at $1.05, 23000X (sold 23,000 October 24 calls and bought 23,000 October 26 calls). This strategist might be selling this spread and looking for volatility to stay at low levels through the Fall, which might be a bold bet because October is a historically volatile month for the equity market.

ETF Trading
SPDR Homebuilders Trust (XHB) saw heavy trading ahead of pending home sales numbers due Tuesday morning. The fund, which holds shares of leading homebuilding and housing companies, added 39 cents to $15.46 and options volume rose to 7.5X the average daily, led by sellers of August 15 and 16 call spreads. The August 16 calls traded 42,150X and the August 15 calls, 24,544X. It appears that one or more investors were rolling out of the now in-the-money August 15 calls, which have more than 40,000 contracts of open interest, and opening new bullish positions in the out-of-the-money $16 call options.