Sector Leaders 08-18-2010

Cusick’s Corner
Walking into the Midday, all major Equity Indices are positive with clear leadership to the upside in Tech, QQQQ, Commodities, MOO/COW, and Retail, XRT/TGT. We want to see if the rest of the market starts to exhibit this strength to the upside into the After Hours. We are still seeing record low Bond Yields, 10 YR Treasury at 2.61%, plus Energy, OIH/XLE, could be a lag on any meaningful upside. See you After Hours.

Stocks are trading mixed on a relatively slow news Wednesday. With no economic news to guide the morning action, the focus was on earnings. Target (TGT) traded down early after the retailer reported in-line earnings for the most recent quarter, but shares have since rallied 5.8 percent off session lows and are now up 2.9 percent on the session. Analog Devices (ADI) and Chico’s FAS (CHS) are also higher on earnings. Deere (DE) and BJ’s Wholesale (BJ) are seeing post-earnings weakness. Overall, trading Wednesday has been choppy and the action has turned positive into midday. The Dow Jones Industrial Average has traded in a 133-point range and is up 47 points. The CBOE Volatility Index (.VIX) lost another .79 to 23.54 and trading in the options market remains active, with about 3.9 million calls and 3.4 million puts traded through 12:45 ET.

Bullish
Brocade, a San Jose, CA data storage device maker, is trading up 18 cents (BRCD) to $5.15 and call options are seeing heavy trading ahead of the company’s earnings report. About 22,000 contracts traded, which is 4X typical volume for midday and compares to 790 puts. August 5 calls are the most actives, with 7,460 traded. October 5, January 5, January 6, and October 6 calls are seeing active trading as well. While some of the activity is likely closing activity, some investors also appear to be buying premium as a way to play the stock ahead of the profit results, due out after the closing bell today.

Two massive blocks of call options traded on Microsoft (MSFT) Wednesday morning. Shares are up 19 cents to $24.90 and a block of 130,000 September 28 calls traded at a nickel. Another 90,000 September 27 calls traded at a dime. The block of 27s looks like a new position (volume exceeds open interest) and this looks like a roll down in strike prices. In late July, an investor opened a massive position in September 28 calls. The stock was around $26 at the time and the value of the calls has fallen to only a nickel. In short, it appears that the investor is taking a loss on the 28s, but also opening a new bullish position in the lower strike.

Bearish
NASDAQ OMX Group (NDAQ) is up 12 cents to $20.25 and options volume is 3X the average daily, with 4,400 puts and 215 calls traded in the name. The focus is on the March 16 puts and includes a sweep buyer, paying 70 cents to snap up 3,500 contracts across multiple exchanges. 4,080 contracts traded. The action comes a few weeks after the exchange reported earnings and as the stock has been trading mostly sideways through the month of August. These put buyers might be concerned about the outlook over the next two quarters and are buying March puts.

IShares Real Estate ETF (IYR) is an exchange-traded fund that holds both Real Estate Investment Trusts [REITs] and shares of real estate companies. The fund is up 25 cents to $51.83 and a noteworthy spread traded in the September 50 and 45 puts. A strategist paid 78 cents to buy the 50s and sell the 45s, 10000X in midday trading. This investor might be looking for the sector to come under pressure over the next few weeks or might be using the spread as a hedge.

Unusual Volume Movers
US Steel (X) options volume is running 5.5X the usual, with 229,000 contracts traded and call volume accounting for about 77 percent of the activity.

Potash (POT) options activity is running 3X the usual, with 160,000 contracts traded and call volume representing 67 percent of the volume.
Emulex (ELX) options volume is running 13X the usual, with 31,000 traded and put volume representing 93 percent of the activity.

Unusual volume is also being seen in AK Steel (AKS), Huntsman (HUN), and Target (TGT).

Implied Volatility Movers
Jazz Pharmaceuticals (JAZZ) implied volatility is easing, as shares rally on news an FDA review concluded that the company’s arthritis drug is effective. The treatment faces a New Drug Application before the FDA Friday. Shares are up $1.05 to $11.30 and options volume is running 3X the average daily, with 9,640 calls and 2,485 puts traded so far. Implied volatility is down about 8 percent Tuesday, but remains elevated around 128 ahead of Friday’s FDA news.