Market Technically Signaled a Potential Turn 08-05-2010

Cusick’s Corner
The market, while down, has still been able to hold its ground into the Midday. We continue to see minor new highs intra-day, only to have the market grind back to basically breakeven. While the trend to the upside is still intact, there needs to be some tighter risk management to the upside and some homework possibly done on some low-risk, bearish plays. If the market pops tomorrow, say to 1140 on S&P after the employment data (premarket) and then later pulls back, the 1100 and 1080 come into play. If we have a pop with a sustained rally, to say 1150 on the S&P, the bulls could potentially have a nice head of steam to start to challenge the highs. So, what’s the take away? Well, the market signaled a potential turn technically, which to a trader is a heads up -- get prepared and do not be complacent. Alright, see you After Hours.

Stocks are broadly lower on disappointing economic data and cautious trading ahead of Friday’s jobs report. The table was set for early losses on Wall Street after the Labor Department said filings for jobless benefits increased by 19,000 to 479,000 in the last week of July. Economists were looking for a decline of about 5,000. The weekly report held a bit more sway than usual because it comes the day before the Labor Department’s monthly report. Consequently, with no other economic data to guide the market Thursday morning, the major averages slipped at the open and never recovered. The decline has been orderly thus far, however. The Dow Jones Industrial Average is off 35 points and the NASDAQ down 12.5 through midday. The CBOE Volatility Index (.VIX) gained .29 to 22.50. Trading volume is running about typical levels, with about 3.2 million calls and 2.6 million puts traded through 11:30 ET.

Bullish
Agricultural commodities are in focus Thursday after Russia announced plans to ban wheat exports due to a severe drought. Grain prices are sharply higher on the news and the Powershares DB Agricultural Fund (DBA) is up 2 cents to $26.37. DBA, which is an exchange-traded fund designed to track prices of corn, wheat, and other agricultural product, has rallied 14.4 percent over the past two months. Options traders are taking notice. Options volume is almost 10X the average daily today, with about 34,000 calls and 940 puts traded in the fund so far. The top trade is an October 27 – 29 call spread, 12000X, on PHLX. The spread was traded between customers, according to a source on the floor. So, while one investor took the bullish spread, the other sold the spread and is holding a bearish position.

Archer Daniels Midland (ADM) is up $1.55 to $30.15, as higher grain prices could potentially boost the company’s profits. Meanwhile, total options volume is running 6.5X the average daily. 23,000 calls and 11,000 puts traded in the name so far. August 30 calls are the most actives, with 7,250 traded. August 31, December 30, and Jan-12 30 calls are seeing brisk trading as well.

Bearish
While some of the agricultural commodity-related names are seeing relative strength on the rally in wheat futures, some of the food producers, which could see lower profits due to higher commodity prices, are seeing relative weakness. Kraft Foods (KFT) slips 15 cents to $29.60 and August 29 puts are actively traded. 3,467 have changed hands through midday, and 90 percent have traded at the Ask, which indicates increasing buying interest. August 30 puts and calls are seeing interest as well. Kraft, which is a component of the Dow, is also due to report earnings after the close of trading today.

Meanwhile, Kellogg’s (K) lost $1.44 to $49.32 and action is picking up in the September 45 puts. 3,594 contracts traded, and 92 percent traded at the Ask. Another 1,400 August 50 calls changed hands, 99 percent Ask. 5,650 puts and 480 calls now traded in Kellogg’s, sending implied volatility soaring about 17 percent to 20.75.

Unusual Volume Movers
Transocean (RIG) options volume is running 2X the usual, with 106,000 contracts traded and call volume accounting for about 69 percent of the activity.

Sandridge Energy (SD) options activity is running 8.5X the usual, with 98,000 contracts traded and call volume representing 66 percent of the volume.
Potash (POT) options volume is running 2.5X the usual, with 80,000 traded and call volume representing 66 percent of the activity.

Unusual volume is also being seen in Valero (VLO), Tesoro (TSO), and Annaly Capital (NLY).

Implied Volatility Movers
Some of the meat producers are seeing higher implied volatility, as the sector displays relative weakness on news Russia has banned wheat exports. For example, Tyson Foods (TSN) is down 5.5 percent to $16.61 and implied volatility up 3 percent to 36. Relative weakness and higher implied volatility is also being seen in Smithfield Foods (SFD), Pilgrim Pride (PPD), and Sanderson Farms (SAFM).