Bearish Sentiment Rolled Over 09-01-2010

Cusick’s Corner
Well, the overwhelming bearish sentiment rolled over into a huge upside gap into the Midday. The data was bad, the sentiment indicators were bad and market participants were extremely bullish -- this is a great recipe for upside, right? The more pertinent question is -- where do we go from here? After the initial spark, the market has been grinding in a tight range of 1076-1078 on the e-mini S&P. Traders will be watching for some potential breaks, see if they hold and potentially grab some more upside. The hard part for shorts at this stage is getting rid of the feeling that they are not getting in front of a train. Watch the Tech sector, specifically Semis (check out CY in the Bearish section), for any notable bearish positioning or lag in these segments which could be a red flag on the sustainability of this move. See you After Hours.

The month of September started off with a bang! Economic data was in focus early after ADP reported that the US economy lost 10,000 private sector jobs in August, which was significantly worse than expected. Economists had predicted an increase of 37,000. Yet, the major averages opened on solid footing as investors seemed to look beyond the poor jobs number and at gains in overseas markets. Global equity markets rallied around better than expected data in China and Australia. Benchmarks are broadly higher in Europe, led by a 3.8 percent surge in France’s CAC 40. Meanwhile, positive manufacturing numbers helped send stocks higher in the US after ISM reported that its index improved to 56.4 in August, from 55.5 and much better than the 52.9 predicted by economists. Stocks rallied on the news and the Dow Jones Industrial Average is up 235 points midday. The NASDAQ added 56. Meanwhile, the CBOE Volatility Index (.VIX) is off 1.47 to 24.58. Options action is running at a fast pace, with about 4.2 million calls and 3.2 million puts traded through 12:15 ET.

Bullish
Burger King (BKC) shares gapped higher and options are actively traded on reports private equity firm 3G is looking to buy the company. Shares opened north of $19 per share, before falling to almost $17, and now up $2.41 to $18.86. Numerous news services have covered the story, including Dow Jones and Reuters. Meanwhile, options volume surged to 9X the average daily. 43,000 calls and 9,050 puts traded on Burger King through midday. September and October 20 calls are the most actives, as short-term speculators take positions on hopes for some sort of an official announcement in the days or weeks ahead.

Ensco (ESV) is up $3.26 to $44.04 and options volume in the oil drilling company is 3X the average daily, with 8,070 calls and 1,380 puts traded so far. The overall tone of trading seems bullish, as players are showing the most interest in September calls with strike prices ranging from 43 to 47. October 45 and 46 calls are busy as well. No news on the stock and the bullish trading might be a sector play in anticipation of additional gains for the drillers (see implied volatility mover below).

Bearish
There isn’t a lot of bearish activity to report Wednesday, as the major averages experience an impressive rally and players are probably reluctant to lean too far on the bearish side in today’s market. Cypress Semiconductor (CY) puts are active. Shares are up 30 cents to $10.88 and options volume is 2.5X the average daily, with about 12,000 puts and 500 calls traded so far. January 12.5s are the most actives. 4,000 traded and, with 59 percent on the bid, it looks like put buyers are taking positions. It might be based on expectations for forthcoming weakness in the chip sector after Intel issued a revenue warning last week.

BB&T (BBT) saw a noteworthy trade Wednesday. Shares are up 72 cents to $22.84 and one player bought the October 22 – 23 strangle at $1.69, 5000X. That is, they bought 5,000 October 22 puts and also bought 5,000 October 23 calls. This strangle is not necessarily a bearish play, but it’s a bet that shares of the regional bank will exhibit heightened volatility from now through October.

Unusual Volume Movers
Brocade (BRCD) options volume is running 3.5X the usual, with 78,000 contracts traded and call volume accounting for about 89 percent of the activity.

American Capital (ACAS) options activity is running 12X the usual, with 35,000 contracts traded and call volume representing 99 percent of the volume.
Altera (ALTR) options volume is running 4X the usual, with 21,000 traded and put volume representing 59 percent of the activity.

Unusual volume is also being seen in Coach (COH), Rowan Companies (RDC), and Sotheby’s (BID).

Implied Volatility Movers
Transocean (RIG) implied volatility is easing, on a good day for the oil drillers Wednesday. The PHLX Oil Service Index (OSX) is up 8.53, or 5 percent, to 179.65 after crude oil rallied $2.33 to $7.45 a barrel. Transocean, one of the largest drilling companies by market value, is up 4.1 percent to $53 per share, with about 22,000 calls and 7,800 puts traded through midday. Meanwhile, RIG implied volatility has eased about 5 percent to 46.