Recovery in Place? 07-07-2011

Cusick's Corner
Now we wait for payrolls and unemployment pre-market and while that is important, the market already ran up on what is expected to be a better than expected private payrolls. So what does this mean for all of us if we start seeing data like this? Well, recovery is in place, quelling the fears of last week. The long and short -- the tone is strong to the upside, in spite of the overbought nature of the market. I trade the market based on what I can see and understand and right now this is a market that is in an up cycle but not trend change. That means that I look at strategies that maximize yield of a net portfolio, looking at stocks that pay either a dividend or slap a short call on the stocks I own. I would also use spreads, bullish and bearish verticals, into this number and the earnings cycle. See you Midday.

Stocks rallied around hopes for the economy today. Before the start of trading in New York, ADP said 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 reported that jobless claims decreased by 14,000 to 418,000 last week. Economists were expecting a decline of only 7,000. The better-than-expected jobs data held some sway today because it comes ahead of key monthly jobs data from the Labor Department tomorrow morning. At the same time, retailers were in focus after a number of individual companies released June sales numbers. Gap Stores (GPS) and TheLimited (LTD), for example, rallied after their results topped expectations with help from lower gasoline prices, warmer weather, and discounts. At the end of the day, it seems that hopes for consumer spending and employment were the primary drivers for market action. The Dow Jones Industrial Average rallied for a 93-point gain and the tech-heavy NASDAQ gained 38.4.

Bullish
Sara Lee (SLE) options saw action today, as shares added 25 cents to $19.68. Options volume was 18,000 calls and 1,195 puts, a ratio of 14-to-1. January 20 calls, which are 32 cents out-of-the-money, were the most actives. 12,100 traded and it appears that buyers were driving the action because 80 percent of the flow was at the ask. Another 4,500 October 20 calls. The upside call buying and bullish trading might be related to news of changes at the company's executive level. The snack food company today named Maria Henry chief financial officer of Sara Lee's North American operation.

Bullish trading was also seen in Amkor Technology (AMKR), Emulex (ELX), and American Eagle Outfitters (AEO).

Bearish
Barclay's Bank (BCS) saw increased options volume today. Shares of the British bank added 2 cents to $16.19 and options action included about 5,000 puts and 665 calls. The top trade of the day was a 3,050-contract block of August 16 puts at the 75 cent asking price. The Aug 16 put on Barclay's is currently 19 cents out-of-the-money and expires in 43 days. At the end of the end of the day, 4,800 contracts had changed hands at 75 cents per contract. The activity appears to be downside put buying on concerns about the short-term outlook for Barclay's shares. An investor might be taking positions to hedge stock.

Bearish flow also surfaced in Anworth Mortgage (ANH), Comcast (CMCSA), and Dennison Mines (DNN).

Index Trading
CBOE Volatility Index (.VIX) lost .39 to 15.95 and has fallen nearly 30 percent in less than a month. VIX hit a multi-month closing high of 22.73 on June 16, but has been trading mostly lower since that time. In addition, the market's "fear gauge" hit an intra-day low of 15.3 today and that's a level worth watching. The volatility index fell to 15.5 on May 19, 15.15 on May 31, and 15.12 on July 1. The low-fifteens have served as a floor for the volatility index and, since it is revisiting that level, it could indicate that that market is short-term overbought. That is, since VIX is at the lower end of its range, it suggests that investor sentiment is relatively bullish and complacent. From a contrarian view, this type of sentiment urges a bit of caution because it often happens at or near short-term market tops.

ETF Action
An interesting spread surfaced in the SPDR Financials today. Shares added 25 cents to $15.66 and an investor apparently bought 25,000 October 16 puts at 88 cents and sold 50,000 October 15 puts at an average price of 46.5 cents per contract. Consequently, they collected a nickel on this 1X2 put ratio spread and are possibly looking for shares to fall towards $15 through the October expiration, which represents a decline of 4.2 percent. There's also additional risk to the downside because only half of the October 15 puts are covered by the October 16 puts. An alternative would be to also purchase October 14 puts and create a hedged position in the XLF Oct 14 - 15 - 16 (1X2X1) put butterfly spread, which would also have a max payoff at $15 and limited risk to the downside.