GDP Next Big Number to Watch 08-26-2010

Cusick's Corner
Stocks did open higher today because the jobless report was not as bad as expected, but the market then ran into resistance and later stalled. The S&Ps settled below the technical and psychological support level of 1050 which could signal more volatility on the horizon. GDP is the next big number to watch tomorrow at 8:30am ET. School will be back in session starting in September for optionsXpress customers. The optionsXpress Education team will offer two types of interactive workshops for either New or Advanced Traders. Go to our Events page to see the latest metro areas listed. See you Friday.

The major averages slumped in uninspired market action Thursday. Trading was steady early after the Labor Department reported that filings for jobless benefits fell by 31,000 to 473,000 in the week ended August 21. Economists were looking for a smaller decline of 19,000. However, the major averages came under pressure later amid ongoing concerns about the economy after the Federal Reserve Bank of Kansas City reported sluggish manufacturing activity in its district. Trading was choppy through midday and then a round of selling sunk the Dow Jones Industrial Average into the close. By the end of the day, the Dow was off 74 points to 9,986, closing below 10K for the first time since July 6.

Bullish Flow
Options activity picked up in General Mills (GIS) after CNBC’s David Faber reported that Nestle might make a bid for the food company. According to Faber, Nestle sits on $28 billion in cash and might use some of it to either buy GIS or the L’Oreal. General Mills shares didn’t react much, closing down four pennies to $35.21. However, options volume surged to 5X the average daily. 34,000 calls and 5,600 puts traded in the name. October 40s were the most actives. 10,790 traded. October 36, 37.5 and 39 call options were heavily traded as well.

Bullish flow was also detected in Principal Financial Group (PFG), Bristol Meyers (BMY), and RedHat (RHT).

Bearish Flow
Charles Schwab (SCHW) saw a day of heavy trading Thursday after Morgan Stanley downgraded the stock to Equal Weight from Over Weight. Shares of the discount broker hit a new 52-week low and closed down 34 cents to $13.15. Options volume hit 15X the average daily, with about 26,000 puts and 1,725 calls traded on the day. The March 13 puts were the most actives, with 23,680 traded and 81 percent trading at the Ask, suggesting buyers were dominating the action and bracing for a possible move below $13 per share.

Bearish flow also picked up in International Game Technology (IGT), CVB Financial (CVBF), and Charles Schwab (SCHW).

Index Trading
The CBOE Volatility Index (.VIX) strayed from its normal pattern Thursday. The market’s “fear gauge” lost .39 to 24.99, even as the S&P 500 Index (.SPX) finished down 8 points. VIX normally rises when the market moves lower. Yet, while the S&P 500 fell, it’s important to note that actual levels of volatility remain low. The 20-day historical volatility of the S&P 500 is only 16.6 percent. While VIX is a forward-looking measure of volatility, historical volatility is a measure of price movement in the past. Therefore, since the actual volatility is only 16.6 percent and VIX is near 25, it probably has limited upside unless the market starts making larger price swings. That is at current levels, VIX seems very high relative to actual volatility.

ETF Trading
The Financial Select Sector Fund (XLF) saw big trades Thursday. The fund, which holds all of the financial-related names from the S&P 500, finished the day down 11 cents to $13.44. Meanwhile, in options action, one strategist initiated a bullish three-way spread – buying 114,000 September 15 calls at a nickel to buy the September 14 –13 put spread at 41 cents, 114,000X. The strategist collected 36 cents per three-way spread and is possibly exiting a position opened two weeks ago at 31 cents. If so, they were probably bearish on the financial sector, but now that the fund is down from more than $15 per share earlier this month, they are taking the 6-cent profit on the spread.