Earnings Ahead 07-08-2011

Cusick's Corner
Buyers showed up at the close, and I am holding the long deltas in the S&Ps and short deltas in the bonds over the weekend. The thought process is that next week we have earnings plus the anticipation for solid numbers that could potentially start to drive the market early. The bonds held 3% and now sit at the 50% retracement off the yield highs of 3.26% last week and right at the 50-Day Moving Average. With only one open market purchase on the docket next week and the potential for a strong kick off of earnings next week, hard pressed to see bond prices holding in that scenario. Have a great weekend and I will see you Midday.

Stocks stumbled on disappointing jobs data Friday. One day after an upbeat employment report from ADP helped spark a broad market rally, hopes for quick turnaround in the employment outlook were dashed when the Labor Department said today that the US economy added only 18,000 new jobs last month. Economists were expecting to see an increase of 80,000. May numbers were also revised down and the rate of unemployed increased to 9.2 percent from 9.1 percent. Economists were expecting the unemployment rate to hold steady at 9.1 percent. The poor jobs data sent stock index futures sharply lower and set the table for morning weakness on Wall Street. However, the decline has been orderly thus far. The Dow Jones Industrial Average finished the day down 62.29 points and the tech-heavy NASDAQ lost 12.85 but well off the opening lows.

Bullish
A substantial roll spread trades in Procter and Gamble (PG) today. In this trade, the strategist sold 22,500 January 65 calls at $2.27 and bought 22,500 January 70 calls at 67 cents per contract. Therefore, they collected $1.60 on the spread. A similar trade surfaced yesterday and was updated in the midday report when the Jan 65 - 70 call spread was sold at $1.58, 17,700X. Today's open interest data indicate rolling of a position down in strikes. That is, they sold the 65s to open and bought the 70s to close. This is a conservatively bullish trade, it seems to reflect expectations that shares will hold below $66 through the expiration. A shareholder might have initiated the premium sale as part of a covered call or buy-write strategy. PG closed down .02 cents to $64.93.

Bullish trading was also seen in Ford (F), Sanofi (SNY), and United Therapeutics (UTHR).

Bearish
Saks (SKS), which gained 2.5 percent on upbeat June same store sales results yesterday, has given back 14 cents to close $11.56. Options volume in the retailer is running 5.5X the average daily. 7,660 puts and only 185 calls have traded in Saks today. The action is heavily concentrated in January 11 puts. 6,800 changed hands, including a 1416-contract block at the $1.15 asking price. Looks like a downside hedge or maybe a bearish bet on concerns shares will slide below $11 through the January 2012 expiration. Shares had fallen to a multi-month low of $10.02 on June 16, but have rallied 15.3 percent since that time.

Bearish flow also surfaced in TRW Automotive (TRW), Molex (MOLX), and El Paso (EP).

Index Trading
CBOE Volatility Index (.VIX) moved up today, but doesn't seem to reflect any real panic or fear on Wall Street. VIX, which tracks the expected volatility priced into S&P 500 Index options and is sometimes called the market's "fear gauge", closed up .32 to 16.27. It is a far cry from the levels seen in mid-March, when worries about the Japanese quake and European Debt Crisis sent the index rallying to 31.28. In fact, VIX dipped to 15.3 yesterday and the lower end of its recent range. So, while stocks are under pressure on poor jobs data, the decline thus far seems orderly and not indicative of any type of extreme negativity or panic among investors. One reason perhaps is that a weak employment outlook is not exactly new or unexpected information.

ETF Action
Puts on the iShares Emerging Markets Fund (EEM) had heavy trading today, as shares closed down 55 cents to $47.93. 185,000 contracts traded, which represents twice the typical volume and compares to call volume of 24,000 contracts. The top trade is a 29,000-contract block of September 46 puts traded at the $1.38 asking price. 34,210 contracts traded. August 46 puts are the most actively traded contract on the emerging markets ETF. 64,810 changed hands. 46 strike puts on the EEM are 3.7 percent out-of-the-money and some investors might be buying the August and September on concerns that today's jobs data and volatility in the US equity market will spill over when many of the emerging markets begin trading again next week.