Consumer Stays Home - Retail Sales Flat 08-13-2010

Cusick’s Corner
The data that came out this morning was encouraging on the surface, but in reality, when you take out car and gas sales, we’re still in a very fragile recovery. Small Caps, RUT, and Tech, XLK, continue to lag, weighing down a potential upside run. The lack of participation is these high Beta stocks could just be another indication of the “Risk Off” trade that we have been seeing for the last three sessions. This would also explain the rise of Gold and the pullback in the Euro currency, FXE. The decoupling of these segments has heightened market player senses to the point where if these two diverge any further, there could be chatter that the EU may have some more potential “bumps” in the road. At this stage the market looks content to stay in a tight range into the After Hours, but who knows -- it is Friday the 13th.

Major averages are modestly lower on a morning of slow trading Friday. After a three-day 324-point drop, the Dow Jones Industrial Average opened a bit lower after the latest monthly Retail Sales report showed an increase of .4 percent in July, which was slightly less than the .5 percent that economists had expected. Separate data showed the Consumer Price Index [CPI] up .3 percent, and .1 percent more than expected. A third piece of data, released during market hours, from the University of Michigan, showed an index of consumer sentiment moving up to 69.6 in August, from 67.8 the month before and less than the 70.0 that economists had expected. At the end of the day, the data failed to reassure investors about the murky macro-economic backdrop and the Dow extended its losses in morning trading. However, since then, market action turned mixed, with the Dow Jones Industrial Average up 5 points, but the NASDAQ down 7.3. The CBOE Volatility Index (.VIX) edged up .14 to 25.87. Options volume is on the light side, with about 2.4 million calls and 2.5 million puts traded through 12:00 ET.

Bullish
Hewlett Packard (HPQ) had a rough week following news late last Friday that the company’s CEO stepped down due to sexual harassment allegations. Shares fell 8 percent Monday and are down nearly 12 percent since last Thursday. However, HPQ added 70 cents to $40.84 this morning and, in options action, 55,000 calls and 21,000 puts traded on the computer maker. The top trades include a September 42 – 45 call spread traded at 69 cents, 12000X. This same spread traded in similar size late-yesterday at 60 cents and this strategist might be banking a quick 9-cent profit after today’s move higher in the share price.

Intermune (ITMN), which has been reeling since the FDA declined the company’s lung treatment in early May, is seeing increasing options action. Shares are up 2 cents to $9.99 today, but down 78 percent since May 4. Meanwhile, options volume is running 2.5X the average daily Friday, with about 8,400 calls and 280 puts traded in the biotech so far. January 2010 calls at the $10 strike are the most actives and the activity includes several lots traded at the $3.30 asking price. 7,200 traded so far.

Bearish
A noteworthy spread traded in the iShares FTSE Xinhua China Fund (FXI) Friday morning. This fund is up 8 cents to $40.09 today, but down 5 percent since Monday following a volatile week for the global financial markets. One player seems to bracing for additional weakness through November and paid $1.04 for the Nov 38 – 33 put spread, 10000X in morning trading. The strategist bought 10K 38s and sold 10K of the 33s, which creates a bearish position with a max pay-off if shares fell to $33 or less by the November expiration.

Meanwhile, the iShares Hong Kong Fund (EWH) is unchanged at $16.24, after falling 1.6 percent Monday through Thursday. Options action is picking up in the fund as well, with 7,760 puts and 260 calls traded so far. Most of the action is in the August 16 puts after 7,150 contracts traded at the asking price, mostly at 15 cents. This looks like a bearish short-term play in anticipation of weakness in Hong Kong’s equity markets next week. August options expire one week from today.

Unusual Volume Movers
Dynegy (DYN) options volume is running 149X the usual, with 59,000 contracts traded and call volume accounting for about 94 percent of the activity.

Apollo Group (APOL) options activity is running 2X the usual, with 24,000 contracts traded and put volume representing 74 percent of the volume.
JC Penney (JCP) options volume is running 2X the usual, with 15,000 traded and call volume representing 61 percent of the activity.

Unusual volume is also being seen in Autodesk (ADSK), Nordstrom (JWN), and MGIC Investment (MTG).

Implied Volatility Movers
Apollo Group (APOL) options are active and implied volatility is higher as many of the for-profit education names (DV, COCO, CECO) remain under pressure amid concerns about greater regulatory scrutiny of federal financial aid offered to students that attend for profit institutions. APOL touched a new 52-week low and is down $1.55 to $38.92 midday. Options volume is running 2.5X the average daily, with 21,000 puts and 6,500 calls traded in the name so far. Implied volatility jumped 4 percent to 51.