Yield is King - Sectors to Watch 08-12-10

Cusick’s Corner
As I mentioned in the Midday, deflation is on the minds of market insiders and the Fed seems to be a hotter topic within the trading community. So it may be worth discussing some sectors that could potentially out perform in a deflationary market. The traditional safe havens are Bonds, TLT, and Gold, GLD. But since it’s currently more of a traders market, sectors like Utilities, XLU, and Telecom, TTH, are moving because of their great dividend yield. Yield is King in a disinflationary or deflationary market. See you Midday.

Stocks finished lower following another round of disappointing economic and earnings news Thursday. After Wednesday’s 265-point slide, the Dow Jones Industrial Average faced additional selling pressure Thursday morning after the Labor Department reported that filings for jobless benefits rose by 2,000 to 484,000 last week. Economists were expecting to see a decline of about 17,000. Stock index futures had already fallen into the red prior to the data following losses in overseas markets and after Cisco Systems (CSCO) shares fell on disappointing earnings guidance. Yet, Thursday’s decline was orderly and trading slowed during the second half of the day. At the closing bell, the Dow was off 59 points on the day, but 51 points off session lows. The NASDAQ lost 18.4.

Bullish Flow
ATP Oil and Gas (ATPG) saw increasing options action Thursday. Shares of the Houston, TX oil and gas company have been battered in recent months on concerns about the impact of the Gulf spill on the company’s profits. From mid-April to mid-July, shares fell from roughly $23 to less than $10. Thursday, however, the stock was up 69 cents to $12.70 and has now staged a four-day 14.6 percent rally. Some options players are taking notice. For example, in late-day action Thursday, one investor bought 2,000 December 15 calls at $1.54 per contract. At the end of the day, 15,000 call options had traded in the name, which represents twice the normal volume and 3X the number of puts that changed hands on the day.

Bullish flow was also detected in Wendy’s (WEN), Pacific Sun (PSUN), and Taiwan Semiconductor (TSM).

Bearish Flow
Apollo Group (APOL) hit new 52-week low and finished down 83 cents to $40.47 Thursday. The weakness in the share price comes one day before the Department of Education is expected to issue a decision regarding student loan repayment rates, a move designed to tighten scrutiny on federal aid offered through some private education companies. APOL, a Phoenix-based training and education company, saw cautious trading ahead of the news. Not only did shares fall, but 19,000 puts traded, which is 3X the norm and compares to 2,850 call options. April 39 and 40 puts were the most actives.

Bearish flow also picked up in Collective Brands (PSS), Amkor Tech (AMKR), and Valueclick (VCLK).

Index Trading
The CBOE Volatility Index (.VIX) edged up .34 to 25.73 and has now enjoyed a four-day 18.4 percent run higher. A noteworthy trade in VIX options Thursday morning was a writer of 50,000 August 40 calls at 12 cents per contract. This massive premium sale might be a closing trade. Or, it might be a bet that VIX will stay below 40 through the August options expiration. For VIX, the expiration is next Wednesday which is in 5 days. Since the volatility index hasn’t traded above 40 since late May, the strategist might feel confident that the index will stay below that level through the next expiration. The risks are high, however, because if there is a sudden increase in market volatility, there is theoretically no limit to how far VIX can climb. With a sudden spike, the call writer could be on the hook to pay the difference between the current VIX minus the 40-strike price (x 50,000 contracts).

ETF Trading
SPYders (SPY) saw another day of heavy trading, with about 1.1 million puts and 737,000 calls traded on the exchange-traded fund. SPY holds all of the S&P 500 stocks and like the S&P 500 Index (.SPX), it is market-value weighted. So, large companies dominate the fund and portfolio managers often turn to SPY puts during periods of falling stock prices and increasing market volatility. For example, the top trades in the SPY Thursday look like hedging activity. With shares down 67 cents to $108.63 on the session, one investor bought 26,000 October 108 – 98 put spreads at a $2.64 net debit. This was probably a move to reduce the risk of a stock portfolio. The spread, which involves buying the higher strike and selling the lower one, reaches its best profitability if shares fall to $98, or a market decline of about 10 percent.