Sectors to Watch 06-27-2011

Cusick's Corner
While the market held onto the midday gains, the volume was light and the Greek austerity vote is still a headline risk in the market during this pre-vacation week. So while we watch the potential headlines overseas, do not lose sight of other barometers, .i.e. the offensive sectors, XLY, QQQ, XLF and XLI. Traders like to see three out of the four of these sectors performing not only to the upside but also outperforming a major benchmark like the S&Ps. At this stage we have only two of the four sectors, XLI & XLY that have outperformed the benchmark - so continue to keep an eye on the strength of all these sectors. The data coming out tomorrow, Consumer Confidence, potentially in the XLY, Consumer Discretionary, could bring more volatility. See you Midday.

Investors looked beyond the latest round of disappointing economic news and bid stocks higher Monday. According to a report released before the opening bell, personal spending was unchanged last month. Economists were looking for a .1 percent increase. Meanwhile, incomes rose .3 percent and .1 percent less than expected. Yet, BofA (BAC) shares jumped after Rochdale Securities analyst Richard Bove said that shares of the bank are currently undervalued. BAC gained 3.1 percent and was the Dow's second best gainer. Microsoft was the biggest winner in the industrial average (see today's note in the Bullish section). Beyond that, it was a light news day. At the closing bell, twenty-six Dow stocks were higher, four lower, and the industrials gained 109 points. The tech-heavy NASDAQ added 35.4.

Bullish
Microsoft (MSFT) shares gained 3.8 percent to $25.26 and helped power rallies in both the Dow and the NASDAQ today after a court struck down a law that banned violent video game sales to minors. Microsoft had been opposed to the regulation. Shares jumped on news of the verdict and options in MSFT were very actively traded as well. 207,000 calls and 104,000 puts traded in the software giant today. July 26 calls, which are now 3.2 percent and expiring in 18 days, were the most actives. 38,266 traded. The last trade was at 16 cents per contract. July 25, Weekly (7/1) $25, and August 26 calls saw brisk trading as well.

Bullish trading was also seen in Human Genome Sciences (HGSI), Activision Blizzard (ATVI) and USEC (USU).

Bearish
Puts on Reynold's American (RAI) were heavily traded today after a court ruled against the major tobacco companies in an appeal in Louisiana. RAI hit a low of$36.58 in morning trading, but then battled back and finished the day up 16 cents to $37.22. Although shares rebounded, the options order flow in RAI remained defensive. At the end of the day, 5,470 puts and 165 calls traded on the ticker. August 35 puts, which are 6 percent out-of-the-money and expiring in 53 days, were the most actives. 3,233 changed hands. 100 percent of the volume traded at the ask and open interest is only 163 contracts. So, the activity looks like opening put buyers. November 33 puts saw similar action as well. 1,619 traded.

Bearish flow also surfaced in Lorillard (LO), Netlogic (NETL), and St. Jude Medical (STJ).

Index Trading
It was another quiet day in the index options market today, as volume could potentially be light all week ahead of the Fourth of July three-day weekend. 666,000 calls and 515,000 puts traded on the S&P 500 Index (.SPX), Russell 2000 Small Cap Index (.RUT) and other cash-settled indices today, which is only about 90 percent the recent average daily levels, according to Trade Alert data. CBOE Volatility Index (.VIX), which tracks the implied volatility of S&P 500 Index options, gave up .54 to 20.54 and held above the 20 "psyche" level. Meanwhile, many of the most active index options were upside calls on the VIX. July 27.5 calls saw the most volume. 80,944 traded. July 21, July 22.5, July 30 and August 27.5 calls were heavily traded as well. While the S&P 500 gained 11.65 to 1,280.10, heavy trading in VIX out-of-the-money calls suggests that some investors are still concerned about the potential for increasing volatility this summer, as we head into the final few trading days in June.

ETF Action
Select Sector Energy Fund (XLE) added 38 cents to $71.31 and a block of 41,000 July 70 puts was sold at $1.03 on this ETF. XLE is the exchange-traded fund that holds all of the energy-related names from the S&P 500. The massive premium sale probably closes an existing position. A similar block traded on June 15. At that time, the investor bought 43,000 at $1.51 per contract. Shares have traded down from $71.93 since that time, or .9 percent. However, the position is being closed out at a loss equal to 48 cents per contract. Not only has time decay affected these puts, but slippage (the difference between the bid and ask) is a factor as well. Still, the investor is probably closing out the trade rather than run the risk of further losses. The July 71 put is now 31 cents out-of-the-money and since next Monday is a holiday, there are only 13 trading days left until the contract expires.