Reason Yen's Move is Not Bullish for Japan 08-03-2010

Cusick’s Corner
The market did close the day in the red, another grinding session after an initial pop in the morning. The Japanese Yen currency has been on a tear and some market insiders who often confer with me, gave me some additional insight -- this move in the Yen is not a bullish signal for Japan, but more of a sign that the Japanese could be potentially bringing their risk capital home. Reason being, the Japanese could be seeing some potential volatility that at this juncture would not have explanation. Keep an eye on larger index strategies like straddles and strangles. (Go to oX site to learn more about these strategies.) Seeing larger trades in long straddles or straddles may be a potential signal that strategists are positioning for a volatile move in the next few weeks. See you Midday.

Trading was slow on Tuesday after big gains the day before. The Dow Jones Industrial Average, which rallied for 210-point advance Monday, opened lower after economic data Tuesday morning showed personal incomes and spending flat during the month of June. Economists were expecting no change in spending, but a .1 percent increase in personal income. Later, separate economic reports showed factory orders down 1.2 percent in June; which was better than the 1.8 percent drop in May, but worse than the .5 percent decline that economists had expected. A third piece of data showed pending home sales falling 2.6 percent in June. Meanwhile, the day’s earnings news was mixed (see the ETF section below). At the end of the day, investors found few reasons to bid stocks higher after Monday’s big move. Consequently, the Dow Jones Industrial Average finished down 38 points and the NASDAQ lost 11.8.

Bullish Flow
Genworth (GNW) has been the subject of interesting spread trading during the past two days. Shares lost 41 cents to $13.26 Tuesday and are down some 16 percent since the company reported earnings last Friday. Some investors seem to view the weakness as an opportunity for bullish trades. For example, late Tuesday, one strategist apparently sold 500 December 12 puts at $1.08 to buy 500 December 15 – 18 call spreads at 68 cents. The three-way spread traded 1000X Tuesday and about 4,000X the day before. The strategist is probably looking for a rebound by the December expiration and entering this spread on hopes for a move beyond the $18 strike price during that time. Also, by writing $12 puts; the strategist is saying that they’re willing to buy the stock at that price from now through the December expiration.

Bullish order flow was also seen in Pfizer (PFE), Frontline (FRO), and Arena Pharmaceuticals (ARNA).

Bearish Flow
CIT Group (CIT) shares lost 65 cents to $36.67 and a noteworthy spread traded in the New York-based financial services company late Tuesday. One strategist apparently bought 20,000 January 30 puts and sold 20,000 October 30 puts, creating a massive time spread at a $1.05 net debit. Looking at the open interest numbers, the spread is possibly rolling of a position – or closing out October to buy a new position in January. On the other hand, this might be a calendar spread on expectations that shares will hold above $30 through the January expiration, but then begin to fall from that point forward.

Bearish flow also picked up in Express Scripts (ESRX), GE, and Kohl’s (KSS).

Index Trading
Trading slowed in the index market, with only about 325,000 index calls and 343,000 index puts traded on the session, or 68 percent of the recent average daily. One index did see increasing action: the US Dollar Settled British Pound Index (XDB), which tracks the pound/US dollar currency pair, X 100. The index finished up .53 to 159.47 and options volume rose to 8X the average daily, led by a three-way spread trade. In this position, the strategist apparently bought 300 September 152 calls at $7.93 (probably closing) and sold 300 December 156 put – 162 call strangles at $5.76 (to open), perhaps betting the index will trade in a range between 156 and 162 during the months ahead.

ETF Trading
Options activity picked up in a few of the Select Sector Funds, as some investors look beneath the surface of the major averages and for opportunities with specific sectors of the market. There are nine Select Sector Funds and together they hold the five hundred S&P 500 stocks. For example, the Select Sector Basic Materials Fund (XLB), which holds all of the basic materials names, fell 60 cents to $32.27 after Dow Chemical (DOW) tumbled on earnings news Tuesday. An interesting trade surfaced in the XLB when an investor apparently bought 10,000 January 32 puts and sold 10,000 January 28 puts, to create a bearish spread or hedge in the fund. Meanwhile, the Healthcare Select Sector Fund (XLV) finished up with help from Pfizer’s strong earnings and investors were focused on XLV August 30 calls, with 12,330 traded. Finally, the Select Sector Consumer Discretionary Fund (XLY) lost 39 cents to $31.62 on disappointing earnings from P&G (PG). Players snapped up XLY Jan 19 puts, with 12,500 traded on the day.