Looking for Signals 05-27-2010

Cusick’s Corner
Most traders and investors are just throwing their arms up, not able to really read into these market moves. I am referring to how the market opened on the highs after trading lower overnight on speculation that China was ready to dump their exposure to EU debt, which as we found this morning, was not true. I became skeptical of the late day pullback for three reasons, gold did not move, nor did treasury interest, plus the currency markets had no uptick in volatility. As a matter of fact, the only market that was reacting was the equities, plus the equities were leading the volatility before these other segments, which was a potential signal that a swing long was potentially afoot. I want to leave you with some points to consider over this latest move -- are we looking at a real bullish turning point or is this looking like a potentially deeper bear market? Also, ask yourself if the move today was due to larger players reallocating or short squeeze into end of the month and long weekend. See you After Hours.

Stocks are broadly higher, as events overseas are once again overshadowing the day’s domestic news. Major averages rose across Europe Thursday after China assured investors that it wasn’t planning on selling European debt. The comments from the agency, which controls $2.5 trillion in foreign exchange reserves, comes the day after Financial Times warned that China might be looking to unload European debt, which would signal a lack of confidence in eurozone policy-makers. Benchmarks across Europe rallied on China’s reassuring words and the euro moved back towards 1.225. Meanwhile, in the US, the day’s economic news showed first quarter GDP up at an annual rate of 3 percent, and below economist estimates of 3.3 percent. Separate data showed jobless claims down 14,000 to 460,000 last week. Economists were looking for a bigger drop, to 455,000. Yet, with European markets up and the euro rebounding, the data didn’t seem to matter much. The Dow Jones Industrial Average is up 200 points. The CBOE Volatility Index (.VIX) dipped back towards 30 and was recently down 4.66 to 30.36. Options volume is slowing, with some investors already looking out to the extended three-day Memorial Day weekend. About 4.3 million calls and 3.6 million puts traded at 12:30 ET.

Bullish
British Petroleum (BP) is up $2.91 to $45.32 and options action is brisk after Bloomberg reported that the company’s “Top Kill” operation is having some success in containing the Gulf spill. 81,000 calls and 37,000 puts have traded on BP through midday. Most of the action has been in smaller lots, but the top trade of the day is 4,400 January 47 calls at $3.75 per contract. It coincided with a block of 440,000 shares at $45.13 and looks like part of a covered call play, where the investor bought shares and sold calls in anticipation of a move back towards $47 per share by the January 2011 options expiration.

Omnivision Tech (OVTI) is up 11 cents to $18.11 and OVTI call options are seeing some action after Oppenheimer analysts recommended that investors buy shares ahead of earnings, due out after the closing bell. In the options market, some players are eyeing July 20 calls instead. 2545 contracts traded through midday, including a block of 1,500 at the $1.05 asking price.

Bearish
Cheesecake Factory (CAKE) puts options are busy for a second day. As noted in yesterday’s closing report, October 20 puts were seeing interest Wednesday. Today, shares are up 25 cents to $25.49 and the action continues. More than 5,000 October 20 puts traded and, with about 76 percent traded at the asking price, it looks like buyers are once again dominating the trade. The activity is likely to add to the existing open interest, which increased by 5,009 to 6,043 contracts following yesterday’s action.

NetApp (NTAP) shares are up $5.26 to $37.69 after the software maker posted earnings that topped Wall Street views. In the options market, trading remains cautious. More than 6,200 July 37 puts have traded. The action includes a block of 1,000 at $2.20 on the ISE, which is an opening customer buyer according to ISEE data. Total, more than 3,000 NTAP puts have been bought to open on the ISE today, or 85 percent of the total volume, according to ISEE data.

Unusual Volume Movers
Seagate Technology (STX) options volume is running 2X the usual, with 54,000 contracts traded and call volume accounting for about 94 percent of the activity.

Select Sector Technology Fund (XLK) options activity is running 3X the usual, with 134,000 contracts traded and call volume representing 71 percent of the volume.

Rambus (RMBS) options volume is running 4X the usual, with 50,000 traded and put volume representing 56 percent of the activity.

Regions Financial (RF), Popular (BPOP), and SLM also had unusual volume.

Implied Volatility Movers
Monsanto (MON) is down 7 percent to $49 per share and implied volatility is higher after the chemical maker lowered its earnings guidance for the third quarter and the 2010 fiscal year. Options action is brisk, with 65,000 calls and 32,000 puts traded so far. Meanwhile, implied volatility is up 5 percent to 42, compared to a 52-week high of 46.5.