Short Covering -- Bad News Was Priced In 09-01-2010

Cusick's Corner
The market rallied in part from some overseas gains, better-than-expected August ISM Index (manufacturing up), plus short covering of positions previously made against the market. As stated in the Midday, some shorts were feeling like they were in front of a moving train, about to get run over. So during today’s rally, some shorts wanted get out of the way and cover their shorts before the nonfarm payroll report due out on Friday. This report will play an important role in the next two trading sessions because it offers insight into the health of US companies and the broader economy. See you Midday.

Stocks staged an impressive rally and the major averages finished near session highs Wednesday. Stock index futures rallied overnight along with overseas markets following positive economic data out of Australia and China. In the US, the focus turned to jobs early after ADP said the economy lost 10,000 in August. Economists had predicted an increase of about 37,000 jobs. Investors seemed to shrug off the numbers and stocks moved broadly higher in early trading. Then, a bit later, the morning rally gathered additional momentum after the ISM Index of manufacturing activity printed at 56.4 in August, from 55.5 in July and much better than the 52.9 predicted by economists. Stocks rallied on the news and never looked back. At the end of the day, the Dow Jones Industrial Average was up 254 points and just 10 points off its best levels. The NASDAQ gained 62.8.

Bullish Flow
Rowan Companies (RDC), a Houston, TX oil and gas driller, saw an impressive rally on a strong day for the oil drillers Wednesday. The Oil Service HOLDRS (OIH) rallied 5.2 percent to $102.35 after crude oil gained $2 to $73.92 a barrel. RDC was one of the stars, rallying 9 percent to $28.02. Meanwhile, in the options market, volume in RDC rose to 10X the average daily, with about 10,000 calls and 5,650 puts traded in the name. Players flocked September 28, October 27.5, and October 29 calls. The action seemed to include a lot of speculative buying, or short-term players bought calls instead of shares as a cheaper way to play the momentum in the driller.

Bullish flow was also detected in Netflix (NFLX), Burger King (BKC), and Sotheby’s (BID).

Bearish Flow
Not much bearish trading was seen Wednesday, but a handful of names did see increasing put activity. Coach (COH), the NY-based maker of premium shoes and handbags, was one of them. Shares finished up $1.75 to $37.59 and options volume rose to 3X the norm. 8,360 puts and 2,825 calls traded. February 2011 puts at the 37 strike saw the most action after 5,330 changed hands. In addition, with 100 percent traded at the ask, it looks like put buyers were driving the flow and possibly looking for COH to give up Wednesday’s gains and dip back below $37 before the February 2011 expiration.

Bearish flow also picked up in Cypress Semi (CY), Ulta Salon Cosmetics (ULTA), and Sherwin Williams (SHW).

Index Trading
Options activity finally picked up in the index market, as the S&P 500 Index (.SPX) rallied for a 31-point gain. About 625,000 calls and 800,000 puts traded across the SPX and other cash indexes, which is about 1.5X the recent average daily volume. Meanwhile, the CBOE Volatility Index (.VIX) lost 2.16 to 23.89 and the most actively traded index options contract Wednesday was the VIX September 25 put. About 70,000 changed hands and some investors might have been closing out positions as the VIX fell and dropped below 25. SPX September 1075 calls and puts were the second and third most actives. SPX finished at 1,080.29.

ETF Trading
Trading was active in the exchange-traded fund marketplace as well, with 1.9 million calls and 2.5 million puts traded across all products. The top trades of the day were in the SPDR S&P 500 Trust (SPY), or Spiders, after the September 104 – 87 put spread traded at 79 cents, 30000X. Shares finished up $3.15 to $108.46 and it looks like a spread seller initiated the trade – selling the higher strike and buying the lower. They might be an institution closing a hedge and expecting SPY to hold above $104 through the September expiration, which is now 16 days away.