Back-to-School Spending 08-05-2010

Cusick's Corner
Trading volume was light today. Many market participants were on the sidelines, waiting for Friday’s nonfarm payrolls report that comes out premarket at 8:30am ET. Most economists are predicting that the unemployment rate will rise to 9.6% from June’s 9.5%. (To access the Economic Calendar, login to your account and click on the Research tab.) Unemployment numbers and consumer confidence ultimately affect consumer spending. Many retailers reported July sales today. Results were mixed overall, but sales in many teen-based stores dropped or did not increase as much as expected because more parents than ever are controlling teen’s back-to-school spending. Many teens aren’t working either, while teen unemployment is triple the national average, resulting in even less money for back-to-school shopping. To recap from the Midday -- if the S&P pops tomorrow to 1140 after the payrolls report and then later pulls back, then 1100 and 1080 levels come into play. If we break 1150 tomorrow, then the bulls may take over. See you Friday.

The underlying tone of trading was cautious Thursday, ahead of key jobs data Friday morning. Attention shifted to the employment situation early after the Labor Department reported that filings for jobless benefits increased by 19,000 to 479,000 in the last week of July. Economists were looking for a decline of about 5,000 and the disappointing report held a bit more sway than usual because it was the day before the Labor Department’s monthly report. Economists expect tomorrow’s data to show the US economy losing another 87,000 jobs in July and for the unemployment rate to edge up to 9.6 percent from 9.5 percent. With not much else to guide investors, market action was relatively slow ahead of the news. The Dow Jones Industrial Average traded in a very narrow 67-point range and finished the day down five points. The NASDAQ lost 10.5.

Bullish Flow
Mosaic (MOS) rallied and options were heavily traded on a good day for the agriculture chemical names. Shares finished the day up 91 cents to $51.29 after wheat futures rallied 8 percent to a 23-month high. Total options volume in Mosaic, which makes crop fertilizer for the agricultural industry, hit 3X the average daily, with 67,000 calls and 19,000 puts traded on the session. The top trade was a block of 6,000 December 60 calls at the $2.20 ask price, which appeared to be a buyer opening a new position and looking for MOS shares to run beyond $60 by the December expiration. At the end of the day, more than 10,000 had changed hands. August 50 calls were the most actives. 12,570 traded on the session.

Bullish order flow was also seen in Penwest Pharmaceuticals (PPCO), ADM, and Veeco Instruments (VECO).

Bearish Flow
Bearish ratio put spreads were initiated in Dish Networks (DISH) ahead of its August 9 earnings report. Shares gained 49 cents to $20.77 and the focus was on the December 20 – 18 (1X2) ratio spread Thursday. For example, 1,500 December 20 puts traded at the $1.58 asking price while 3,000 December 18 puts traded on the 83-cent bid. At the end of the day, the spread had traded 3000X (6000 of the December 18s). This spread looks like a new position and, if so, is a bearish play on DISH. The best pay-off is at $18 per share at the December expiration, or 13.3 percent below current levels.

Bearish flow also picked up in Kellogg’s (K), TFS Financial (TFSL), and Oracle (ORCL).

Index Trading
The CBOE Volatility Index (.VIX) slipped .11 to 22.10 on a day of quiet trading in the index market Thursday. The S&P 500 Index (.SPX) traded in a narrow 8-point range and finished the day down 1.43 to 1,125.81. About 405,000 puts and 220,000 calls traded across all the cash indexes, which is only about 67 percent the normal. One index that did see increasing volume is the Mini-SPX Index (.XSP), which finished the day down .14 to 112.58. About 2,300 calls and 8 puts traded on the index. What is XSP? The index is a pint-sized version of the more actively traded SPX. To be specific, the mini-index is equal to 1/10th of the S&P 500 and its lower price makes it a preferred tool for some individual investors that would rather not pay the hefty premiums associated with playing the higher-priced SPX.

ETF Trading
Financials Select Sector Fund (XLF) fund finished the day down 6 cents to $14.91 and a number of large XLF options blocks traded in Thursday’s session. The top trade was a block of 50,000 September 16 calls at 15 cents. The transaction was part of a ratio “risk-reversal”, where the investor bought the calls and sold half as many (25,000) September 14 puts. All of this was tied to a large position in XLF shares, according to a source on the exchange floor. Separately, another strategist created a bullish spread, buying 12,000 XLF Sep 15 calls and selling 12,000 January 18 calls. Another massive spread included the purchase of 20,000 Sep 16 calls against the sales of 10,000 Sep 14 puts. Overall, these large institutional trades seemed to reflect a bullish view on the financial sector from now through September.