Clues World Economies May Be Healthier Than Anticipated 08-02-2010

Cusick’s Corner
After the early session pop, trading has been a grinding to the upside and the bulls are in control. The trading volume has been light, typical for summer. Adding a little more fuel to this upside move -- Copper (HGU10 +.075) and Crude (CLU10 +2.39), both plays that the world’s economies may be looking healthier than anticipated. The consumer [see XLY +.58] is potentially looking stronger at this stage of the recovery. Make sure that your sizing and your risk management is focused and tight -- August is typically a light trading month. See you After Hours.

Stocks are broadly higher with help from better-than-expected reports on manufacturing and construction spending. Stock index futures had already ticked higher before the opening bell on Wall Street after European benchmarks rallied around strong earnings from HSBC (HBC) and BNP Paribas. Energy-related names also gathered momentum after crude recaptured the $81 a barrel level. Then, the early advance picked up additional steam after the ISM Index of manufacturing activity printed at 55.5 in July; which was down from 56.2 the month before, but not as bad as the 54.2 reading that economists had expected. Separate data showed Construction Spending up .1 percent in June, from –1 percent in May and better than the .8 percent drop that economists had predicted. The Dow Jones Industrial Average rallied on the news and is up 193 points midday. The NASDAQ has added more than 40. The CBOE Volatility Index (.VIX) lost 1.16 to 22.34. Trading is active, with about 3.4 million calls and 2.8 million puts traded through 11:00 ET.

Bullish
Ford Motor (F) has seen a flurry of activity after the latest issue of Barron’s had favorable things to say about the automaker and ahead of auto and truck sales numbers, tomorrow afternoon. Barron’s said Ford shares might move higher on improving profits and increasing market share. The stock is up 38 cents to $13.15 and the top trades of the day are massive September 12 – 13 call spread traded at 65 cents, 150,000X. It appears this spread was sold and is actually a roll up in strikes, or closing out a position in 150,000 September 12 calls bought on July 9 when shares were 21.2 percent below current levels. The action is noteworthy as it comes ahead of auto sales numbers Tuesday.

DB Agricultural Fund (DBA), which is an exchange-traded fund designed to track prices of corn, wheat, and other agricultural products, is up two pennies to $26 and options volume is 7X the average daily, driven by a seller of 7,800 October 25 – 27 call spreads at 90 cents per spread. Like the Ford trade (above), the action looks like a roll, or closing out a winning position in the 25s and opening a similar bullish position in the October 27 calls.

Bearish
UPS is up $1.33 to $66.37 and moving to its best levels in more than two months. Shares rallied last week after the company reported better-than-expected profits and are now up nearly 11 percent since that time. A noteworthy options trade Monday morning is a bearish risk-reversal, where an investor apparently bought 6,000 October 57.5 puts at 79 cents and sold 6,000 October 72.5 calls at 33 cents. This spread looks like a new position and might have been initiated by a shareholder looking to protect recent gains. If so, they have initiated a trade called a “collar”.

Frontline (FRO), a Bermuda-based shipping company is up $1.09 to $31.69 on a good day for the shippers. In the options market, volume in the name is running 2.5X the usual, with most of the focus on the August 30 puts with 3,206 traded so far. While open interest is sufficient to cover, sentiment data indicate that new positions are being bought to open. Therefore, today’s action is likely to add to existing interest and the put buying seems to reflect concerns about the short-term outlook for FRO. August options expire in 18 days.

Unusual Volume Movers
Corning (GLW) options volume is running 3.5X the usual, with 46,000 contracts traded and call volume accounting for about 76 percent of the activity.

HSBC (HBC) options activity is running 3X the usual, with 26,000 contracts traded and put volume representing 69 percent of the volume.
Genworth (GNW) options volume is running 2.5X the usual, with 24,000 traded and call volume representing 68 percent of the activity.

Unusual volume is also being seen in Xerox (XRX), Devon Energy (DVN), and Allergan (AGN).

Implied Volatility Movers
Omnicare (OCR) shares are down and implied volatility up after the company’s CEO unexpectedly announced retirement. Shares are off 36 cents to $24.27 and options volume is nearly 50X the average daily, with about 12,000 puts and 5,000 calls traded through midday. Meanwhile, implied volatility surged 36 percent to 52.