Tech Looking Potentially Overbought 07-28-2010

Cusick’s Corner
The day came off its worst levels, with some short covering into the close. While today’s action was not that enlightening, the economic data, specifically durable goods, did reveal that the investing and trading public at large is still on the sidelines concerning the potential for a stronger recovery into the second half of this year. With Tech and Financials stalling at key resistance, (FYI -- Tech looking potentially overbought at this stage), market watchers are looking for some sort of guidance on where-to next -- watch the Euro currency. The Euro (FXE) and Equities are seeing a nice correlation and while the market has stalled out, the Euro has continued to challenge the upside in its latest counter-trend rally. If this continues, it could be a good sign for Equities.

The major averages finished lower in another day of relatively uneventful market action Wednesday. The day was off to a slow start after data released before the bell showed orders for durable goods falling by 1 percent in June. Economists were expecting an increase of 1 percent. Meanwhile, the day’s earnings news wasn’t so stellar. Boeing (BA) fell 1.9 percent and was the biggest loser in the Dow Jones Industrial Average after its earnings beat Street estimates, but revenues fell short of expectations. Aetna (AET) and Newmont Mining (NEM) also moved lower on earnings. Later in the day, attention turned to the Fed’s Beige Book. The report, which offers a qualitative look at the economy, basically rehashed the same concerns about real estate, employment, and a slow economic recovery. At the end of the day, there wasn’t much positive news to push the major averages higher. Instead, the Dow finished down 40 points and the NASDAQ lost 23.7.

Bullish Flow
Options action picked up in MGIC Investment (MTG), the Milwaukee-based mortgage insurance company. Shares finished Wednesday’s session up 12 cents to $8.88 and options volume hit 3.5X the average daily, with about 12,000 calls and 365 puts traded on the session. Investors were focused on the January 2011 calls at the 10 strike. 11,430 traded on the session. The biggest trade was a block of 3,500 contracts at the $1.35 asking price. Of the 11,430 contracts traded, the average price per contract was $1.34 and the activity seems to be aggressive call buying in anticipation of a move higher in MTG shares through the rest of 2010. No news to explain the bullish trading Wednesday. Shares moved up on earnings one week ago.

Bullish order flow was also seen in Human Genome Sciences (HGSI), Range Resources (RRC), and Chico’s FAS (CHS).

Bearish Flow
Intuit (INTU) shares hit a new 52-week high and finished the day up 2 cents to $39.58 Wednesday. Options order flow seemed somewhat defensive, however, amid increasing interest in October 37.5 – October 34 put spreads. It appears that a buyer initiated the spread at 72 cents, a total of 5,900X in afternoon trading. Since volume exceeds open interest, this looks like a new bearish play, where the strategist is buying the 37.5s and selling 34s, probably looking for the stock to fall to the lower strike by the October expiration. It might be a hedge or a play on earnings, due out around August 19.

Bearish flow also picked up in Medco Health Solutions (MHS), Kellogg’s (K), and Mittal (MT).

Index Trading
Things are really slow in the index market, even as volatility picked up a bit Wednesday. The CBOE Volatility Index (.VIX) finished the day up 1.06 to 24.25. Meanwhile, 240,000 calls and 331,000 puts traded across all index products, or only about 56 percent of the recent average daily activity. One product that did see increasing action was the Dow Jones Industrial Index (.DJX). 73,000 contracts traded on the index. Most of the action was in the June 2011 and June 2012 105 straddles, which both traded 17000X. DJX is a cash-settled index equal to 1/100th of the Dow Jones Industrial Average. The Dow finished down 40 points to 10,498 and so the DJX lost .40 to 104.98. The interest in June 105 straddles (puts and calls) might be a volatility play in anticipation of increasing market volatility from now through June 2011 and June 2012 (However, it might also be rolling or some type of combination – long calls, short puts – strategy.)

ETF Trading
iShares Japan Fund (EWJ) saw increasing options action on a strong day for Japan’s equities markets Wednesday. The Nikkei rallied 2.7 percent and recorded its best single-day gain of the year, with help from electronics names after Canon posted strong earnings. EWJ, which is a US exchange-listed product that holds shares of Japanese companies, finished the day up 11 cents to $9.65 and options volume hit 22X the average daily, driven by buyers of December $10 call options. A block of 30,000 surfaced in morning trading. And then another of 10,000 a bit later. At the closing bell, more than 41,200 had changed hands, as some investors bought the premium for 34 cents and took new positions in anticipation of additional gains for Japan’s markets in the months ahead.