Blue Light Special 07-07-2011

Cusick's Corner
Where is the next Blue Light Special? (Check out AEO in Bullish Flow.) The Consumer Discretionary sector, XLY +1.61%, is outperforming the general market, S&Ps +1.05%, and Retail is red hot today after Junes sales data came out. Along with the Claims data coming better than expected and now getting in to a more palatable level of 410K, that sideline money that I discussed last week is scrambling to get into this market. While this is a catalyst, this is spec capital that can get out as fast as it gets into the market, so I take that with a grain of salt. Also the retail side has shifted sentiment, Put/Call ratio well below 1, and the market is in a resistance zone that at this stage has held, 1350 in the S&Ps. I will be watching the close to see if we do not see some trimming of profits in front of the Employment data tomorrow. More in the After Hours.

Stocks are rallying around jobs data and monthly same store sales results. Before the opening bell on Wall Street, ADP reported that the US economy added 157,000 private sector jobs last month, which was much better than the 60,000 that was expected. Separately, the Labor Department said that jobless claims declined 14,000 to 418,000 last week. Economists were expecting a decline of only 7,000. The better-than-expected jobs data holds more sway than usual because it comes ahead of key monthly jobs data from the Labor Department tomorrow morning. At the same time, retailers are in focus after individual companies released June sales numbers. Gap Stores (GPS) and TheLimited (LTD) are rallying after their results topped expectations with help from lower gasoline prices, warmer weather, and discounts. Overall, investors seemed pleased with the day's news flow so far and, through midday, the Dow has now added 91 points. The tech-heavy NASDAQ gained 37.5. CBOE Volatility Index (.VIX) lost .53 to 15.81. Options volume is running at the highest levels so far this week, with 4.9 million calls and 4.2 million puts traded through 12:15pm ET.

Bullish Flow
American Eagle (AEO) shares are rallying after a number of apparel retailers like Gap Stores and the Limited posted strong monthly same store sales numbers for June. AEO and other teen apparel retailers no longer report monthly results. Still, American Eagle shares are up 89 cents, or 6.8 percent, to $14.02. Options volume in AEO is impressive as well. 83,000 calls and 3,700 puts traded in the name so far. Early trades included bullish plays in the November 15 call options, which have traded 3,600 contracts. However, the big trade of the day was a block of 60,000 February 15 calls traded on the $1.10 bid. A large shareholder might have seized today's strength to sell these out-of-the-money calls against a stock position.

KLA Tencor (KLAC) is up $1.94 to $41.68 after UBS upgraded the semiconductor equipment maker to Buy from Neutral. Options action is heating up in KLAC as well. 7,360 calls and 1,090 puts traded in the name so far. July 42 calls, which are .8 percent out-of-the-money and expiring at the end of next week, are the most actives. 4,718 traded against 1,052 contracts in open interest. About two thirds of the volume has been at the asking price, which indicates buying interest. Some investors are possibly taking positions in these very short-term calls on hopes the momentum from today's rally will continue through next week.

Bearish Flow
Procter and Gamble (PG) shares have added 24 cents to $64.94 and are among 25 components of the Dow moving higher today. Meanwhile, in PG options action, one investor sold a January 65 - 70 call spread at $1.58, 17,700X. That is, they sold 17,700 Jan 65 calls at $2.24 per contract and bought 17,700 Jan 70 calls at 66 cents a contract. If opening, this spread is a bet that shares will hold below $65 through the January 2012 expiration. However, since open interest is sufficient to cover in both contracts, the activity is possibly closing or rolling activity.

Powershares QQQ (QQQ) adds 75 cents to $59.14. The ETF, which holds shares of the NASDAQ 100 companies, has now rallied 8.8 percent over the past 8 trading days. In QQQ options trading Thursday, one noteworthy trade is an August - December 57 put spread, bought at $1.63. 20,000 Aug 57 puts were sold at 66 cents and 20,000 Dec 57 puts bought at $2.29. This calendar spread might be a bet that shares will hold above $57 through the August expiration, but then head lower in the months that follow. It might also be rolling activity, as open interest is sufficient to cover in both contracts.

Unusual Volume
American Eagle Outfitters (AEO) options volume is running 35X the (22-day) average,

with 86,000 contracts traded and call activity accounting for 96 percent of the volume.

Pfizer (PFE) options volume is 2X the average daily, with 82,000 contracts traded and put volume representing 51 percent of the activity.

Target (TGT) options volume is running 3.5X the average daily, with 47,000 contracts traded and call volume representing 69 percent of the total volume.

Increasing options activity is also being seen in CREE, Seagate Technology (STX), and Applied Materials (AMAT).

Implied Volatility Mover
Forest Oil (FST) implied volatility is moving higher Thursday. Shares touched new 52-week lows today and are down $3.22 to $24.85 after the oil and gas producer updated its 2011 outlook, which motivated some analysts to lower earnings estimates for the company. Options on Forest Oil are seeing heavy trading as well, with 6,440 calls and 4,900 puts traded so far. Typical volume through midday is 1,535 contracts, according to Trade Alert data. Meanwhile, implied volatility has jumped 18 percent to 44.