Another Round of Disappointing Economic News 07-01-2010

Cusick’s Corner
The market stayed in a tight range this afternoon after a nice bounce from the morning lows, but this is not a market in which you want to be catching falling knives. For you traders, there is a big employment number tomorrow, so I would suggest that you stay disciplined and may want to re-evaluate both your size and capital risk parameters. For longer-term traders, this is a time to build your best of breed stock lists that you want to have in your portfolio over the long haul. This is the type of market where these stock valuations are going to look appealing, but again, consider establishing long positions by scaling into the stock or selling puts at multiple strike prices. See you Midday.

Another round of disappointing economic news weighed on investor sentiment again Thursday. The Dow Jones Industrial Average fell in morning action after jobless claims numbers showed an increase of 13,000 last week and worse than the 1,000 drop that economists had predicted. The selling intensified mid-morning after separate reports released at 10:00 ET showed Pending Home Sales down 30 percent in May (vs. -10.5 percent consensus), the ISM Index fell to 56.2 in June (vs. estimates of 59), and construction spending slid .2 percent in May (vs. -.9 percent consensus). After several days of disappointing economic news, Thursday’s data added to worries about a global economic slowdown. The Dow finished down 41 points, but up 111 points from its worse levels of the session. Nevertheless, the industrial average is now down in 8 of the past 9 trading sessions and has given up 717 points during that time.

Bullish Flow
DR Horton (DHI), a homebuilder, edged up two pennies to $9.85 despite Thursday’s poor Pending Homes Sales numbers. Bullish trading surfaced in the options market with 13,000 calls and 2,700 puts traded on the day. Investors showed the most interest in the July 10 calls with 10,400 contracts trading. 73 percent of the volume was at the asking price and, since open interest is only 440, the action looks like call buyers playing the builder for a short-term bounce. The stock is down 34 percent in the past two months.

Bullish order flow was also seen in BJ Wholesale (BJ), Office Depot (ODP), and Norfolk Southern (NSC).

Bearish Flow
CBS shares finished down 8 cents to $12.85 and options action picked up Thursday. 17,000 calls and 36,000 puts traded, which is 15X the usual. The reason for the volume spike is unclear because there was no stock specific news on the media company. It seemed somewhat defensive or bearish though. For example, a block of 22,000 August 10 puts traded at the 30-cent ask price late in the day and 23,000 contracts traded total. The rest of the action was scattered across a variety of different expirations and strike prices. January 2012 12.5 calls and January 2011 12.5 puts were also among the most actives.

Bearish flow also picked up in TRW Automotive (TRW), Gannett (GCI), and LDK Solar (LDK).

Index Trading
The CBOE Volatility Index (.VIX) saw a sizeable move lower despite another volatile day in the equities markets Thursday. The S&P 500 traded in a 23-point range and finished down 3.4 points. Meanwhile, the CBOE Volatility Index (.VIX), which tracks the expected volatility of S&P 500 index options, lost 1.68 to 32.86 and finished not far from session lows. The drop in the VIX comes after a three-day 6-point spike and might be technical in nature. The index might also be easing a bit in anticipation of quiet trading around the Fourth of July holiday. Meanwhile, trading in the VIX remains active. 100,000 puts and 100,000 calls traded on the volatility index Thursday.

ETF Trading
Put volume picked up in the SPDR Gold Trust (GLD), as the yellow metal took a hefty hit Thursday. Gold (August) fell nearly $40 to $1208 an ounce. GLD, which is a traded fund that owns the precious metal, tumbled $4.64 to $117.04 per share. Meanwhile, GLD options volume included 211,000 puts and 165,000 calls. Players flocked to July puts at the 115, 117 and 119 lines, with more than 15,000 traded in all three. Implied volatility in GLD options rose 4.5 percent to 23. The fund had been grinding higher throughout 2010, gaining 13.4 percent year-to-date. The sudden and volatile move lower likely spooked some gold bugs and motivated a large amount of put buying in the ETF Thursday.