Going Into July with a Boom 07-01-2011

Cusick's Corner
The month of June is behind us and the market is on a very positive course. I do have some skepticism about the market's move over the last four days because it's been based on the light volume. I will be watching the volume next week and to see if there isn't a pullback where those left on cash island cannot jump onto the ship. Personally I have shifted out of my ratio spread on the recent upside move and have some short deltas, with little risk, just in case of a negative headline or some longs come back from a weekend at the beach and need to pay the tab. Have a great long weekend, time to fire up the grill and hit the pool with the family. Enjoy the fireworks - be safe.

Stocks are broadly higher with help from manufacturing data Friday. The table was set for steady early trading on Wall Street after stock market averages moved higher across the Eurozone and the euro posted modest overnight gains against the buck as well. In the US, the Institute of Supply Management said its index of manufacturing activity increased to 55.3 in June, from 53.5 the month before. Economists were looking for the ISM to decline to 51.1. Separately, the University of Michigan said its consumer sentiment index fell to 71.5 at the end of June. Expectations were for it to hold steady at 71.8. Meanwhile, May construction spending fell .6 percent, compared to expectations for no change. However, a second day of positive manufacturing data seemed to overshadow the day's other economic news and the Dow Jones Industrial Average has rallied for 166 point gain today. The Dow is on a 5-day 645-point run higher. With about an hour left to trade, the tech-heavy NASDAQ added 42.2 points ahead of the three-day Fourth of July weekend.

Bullish
Alpha Natural Resources (ANR) shares are up $1.29 to $46.73 and call options on the coal producer are very actively traded today. The activity might be a delayed reaction to an analyst upgrade. Societe General upped the stock to Buy yesterday. For whatever reason, 23,000 calls have traded in ANR so far today, which is more than 10X the day's put volume. The top trades are part of a spread, in which the strategist apparently bought 2,500 Dec 55 calls at $1.85 and sold 2,500 Dec 65 calls at 49 cents. The spread, for a net debit of $1.36, offers a potential $8.64 pay-off if shares rally to $65 or more through the expiration. It's a high risk-reward play because the breakeven at expiration is at $56.36 per share, which represents a 20.6 percent rally from current levels.

Bullish trading was also seen in Las Vegas Sands (LVS), GM, and NASDAQ OMX Group (NDAQ).

Bearish
Carter's (CRI), the Atlanta, GA apparel clothing maker, is trading up 78 cents to $31.54 and options volume is running 10X the average daily. 4,290 puts and 250 calls traded in the name so far. The top trades are part of spread. The investor bought 1,850 September 30 puts at $1.85 and sold 1,850 September 25 puts at 40 cents. They paid $1.45 for the spread and appear to be positioning for a downside move in shares. The max payout, of $3.55 (excluding commissions), happens if shares fall to $25 or less through the September expiration. A shareholder might have initiated the position to help hedge stock.

Bearish flow also surfaced in MBIA (MBI), Beazer Homes (BZH), and Fastenal (FAST).

Index Trading
CBOE Volatility Index (.VIX) is down 1.05 to 15.47. VIX, the market's "fear gauge", is on a five-day losing skid and has suffered a 26.7 percent loss on the week. The volatility index hit a low of 15.12 today and levels not seen since May 31. VIX tracks the expected or implied volatility priced into S&P 500 index options and tends to ease when stocks rally. Very low readings are sometimes viewed as a sign of excessive bullishness and complacency among investors, which sometimes sets the table for short-term market tops. For example, on May 31, the index fell to 15.12 and stocks had a rough start to the month of June. From the last day of May through June 16, the S&P 500 lost 5.5 percent.

ETF Action
The biggest options trade Friday is in the Powershares QQQ (QQQ) exchange-traded fund. The Qs is the ETF that holds the NASDAQ 100 stocks. Shares are up 90 cents to $57.95 and a 40,000 contract block of Aug 56 puts traded at 81 cents. The block was sold as part of a put butterfly. The strategist also bought 20,000 August 54 puts at 42 cents and bought 20,000 August 58 puts at $1.55. Therefore, they paid 35 cents per Aug 54 - 56 - 58 put butterfly spread and appear to be targeting a move in the Qs back towards $56 through the August expiration, which is in 49 days. QQQ is on a five-day winning streak and is up 7.7 percent since June 17.