Volume is Still Missing 08-30-2010

Cusick’s Corner
Today’s market action was good for traders, but uncertainty and emotion are also high. What’s missing is volume, so you should keep an eye on volume to see if this recent M&A activity pulls in some larger players over this upcoming holiday weekend. Watch Consumer Confidence -- if the consumer is still around, we have a potential glimmer of hope in incomes. See you Midday.

Stocks finished broadly lower ahead this week’s busy economic calendar. The data deluge started with a report on personal incomes and spending Monday morning, which showed incomes up .2 percent and spending increasing by .4 percent for July. The spending numbers were a bit better than expected, but the major averages failed to react positively to the news. Instead, the tone of trading turned cautious ahead of key data throughout the remainder of the week, which includes housing, manufacturing, consumer confidence numbers, and FOMC minutes tomorrow. Monthly jobs data could rattle the market Wednesday and Friday. The Dow Jones Industrial Average was modestly lower through midday in tentative market action and then the selling intensified into the final hour. At the closing bell, the Dow Jones Industrial Average was off 141 points. The NASDAQ had lost 33.7.

Bullish Flow
Costco (COST) shares lost 12 cents to $56.07 and call options activity picked up in the retailer Monday. The focus was predominantly on the October 57.5 calls. 4,370 contracts traded and, with 92 percent trading at the ask, it looks like call buyers were dominating the action. Open interest is 2,756 and so the activity looks like opening trades. Some investors might be initiating new bullish positions and anticipating good news when same-store sales numbers are released on September 2.

Bullish flow was also detected in AMR, American Commercial Lines (ACLI), and AK Steel (AKS).

Bearish Flow
Eaton Corp (ETN) saw bearish trading Monday. Shares lost $1.79 to $70.07 and options volume rose to 4X the normal. One spread trade was responsible for the heightened activity after an options strategist apparently initiated a bearish October 70 – 60 put spread at $2.20 -- bought 1,800 October 70 puts at $2.80 and sold 1,800 October 60 puts at 60 cents. The spread might be to hedge a position in shares. No news on the electrical equipment company today, but the name might be worth watching later this week because it is due to present at a Morgan Stanley Conference on September 1.

Bearish flow also picked up in CB Richard Ellis (CBG), Mirant (MIR) and Janus (JNS).

Index Trading
Overall volume was very light Monday, with about 4.3 million calls and 3.7 million puts traded across the US exchanges, which is only about 64 percent the average daily. Overall share volume was also about 64 percent the norm. The low volume might have been responsible for the higher volatility, as market conditions are thin and many players are away on vacation. A lot of investors seemed to be sidelined ahead of this week’s busy economic calendar as well. Indeed, with the CBOE Volatility Index (.VIX) rallying 2.76 to 27.21, it seems that risk perceptions are heightened heading into data and into the historically volatile month of September.

ETF Trading
It was a slow day in the ETFs as well, with 1.4 million calls and 1.4 million puts traded across all the exchange-traded funds, or 67 percent the recent average daily. One name that did see increasing volume is the iShares Japan Fund (EWJ). It settled the day down 3 cents to $9.49 and one investor sold the January 9 put – 10 call strangle at 56 cents, 10000X. That is, they sold the 9 puts and the 10 calls. With shares exactly midway between the two strikes, this strategist is probably initiating the position in anticipation of range-bound trading in Japan’s equity markets through January 2011.