Bid Lacks Conviction 07-07-2010

Cusick’s Corner
This is a nice move to the upside that looks to be shaking out some of the shorts going into the Midday -- typical as far as moves go in a bearish trending market. Traders are hard pressed to position on the long side because the bid does not have the conviction that is necessary for a sustained or more explosive push to the upside. Let’s see if the longs hold into the After Hours (unlike yesterday), looking for potential resistance at 1041 followed by 1053 on the SPX. See you After Hours.

The major averages are holding gains on a relatively slow news day. With no economic news to guide the morning action, some attention shifted to earnings from State Street (STT). Shares of the bank are up 9.1 percent and helping lift the Financials after the company raised its second quarter earnings outlook. Beyond that, there hasn’t been much news to digest Wednesday. After gaining 57 points Tuesday, the Dow Jones Industrial Average has added 145 points through midday Wednesday. The NASDAQ is up 28. Meanwhile, options volume is running about the typical levels with 3.3 calls and 3.1 million puts traded through 12:30 ET.

Bullish
KB Homes (KBH) is up 31 cents to $10.70 and options volume is running 6X the average daily, with 23,000 calls and 2,375 puts traded so far. Options traders are showing the most interest in August 12 call options. More than 20,000 contracts have traded through midday. In addition, with only 729 contracts of existing open interest and 74 percent of the volume trading at the asking price, it appears that call buyers are taking positions in anticipation of a rally back beyond $12 by the August expiration. Some of the activity might be hedging of short positions in the homebuilder. The stock is down some 45 percent since late April.

US Airways (LCC) is up 87 cents to $8.95 and calls are busy for a second day. Yesterday, investors were showing the most interest in August 9 and 10 call options. Today, another 16,000 contracts traded, which is 2X the expected for midday and 10X the number of puts traded. August 10 calls are leading the action with 9620 contracts traded. The airline reported its June load factor numbers yesterday and after a two-week 25 percent slide, some investors appear to be buying shares and calls on the news Wednesday morning.

Bearish
FTI Consulting (FCN) shares plummeted $10.81 to $32.46 and touched a new 52-week low Wednesday morning after the company lowered its second quarter and full year earnings forecasts. Shares are taking a bruising and options volume is running 10X the normal with 8,270 calls and 5,370 puts traded so far. July 35 calls and July 30 puts are the most actives, as players are taking positions in these out-of-the-money contracts in anticipation of additional volatility in the days ahead. July options come off the board one week from this coming Friday.

Select Sector Financials (XLF) are up 34 cents to $13.94 after positive earnings guidance helped lift the sector Friday. In options action, trading in the exchange-traded fund remains active, with 213,000 XLF puts changed hands so far. While some of the activity is likely closing of bearish trades or hedges, one of the top trades is a buyer of 26,500 January 16 –12 put spreads at $1.96. If it’s an opening play (it might be a closing spread or a roll), this is bearish spread because it makes its best profits if shares fall to $12 by the January expiration.

Unusual Volume Movers
AK Steel (AKS) options volume is running 2.5X the usual, with 35,000 contracts traded and call volume accounting for about 87 percent of the activity.

Sun Trust (STI) options activity is running 4.5X the usual, with 30,000 contracts traded and call volume representing 88 percent of the volume.
Novartis (NVS) options volume is running 7.5X the usual, with 22,000 traded and call volume representing 50 percent of the activity.

Unusual volume is also being seen in Mosaic (MOS), Family Dollar (FDO), and Comerica (CMA).

Implied Volatility Movers
CBOE Volatility Index (.VIX) is down 2.07 to 27.58, as the S&P 500 rallied 19 points Wednesday. VIX is now down four days straight and has fallen 20 percent month-to-date. The decline in the VIX comes as the equity market stabilizes and investors look out to the historically quiet months of July and August. However, any decline in the index might prove short-lived, as the historically volatile months of September and October are also fast approaching.