Looking Back & Looking Ahead 09-24-2010

Cusick's Corner
Trading has been volatile over the past few sessions, but the week ended on a positive note as investors reacted to better-than-expected economic data and the Fed announcement from earlier in the week. The latest Fed statement pledged that the Fed may utilize QE if necessary to protect the economy from relapsing into another recession, basically giving market participants a put which further helped fuel the market bulls. Looking ahead, expect M&A activity to continue as many companies have extra cash on their balance sheets, plus some companies might also start to increase dividend payments. Consumer Confidence comes out on Tuesday. Have a good weekend.

Major averages finished sharply higher following a day of gains in Europe and upbeat economic news Friday. Germany's DAX paced the advance in the euro-zone, gaining 1.8 percent on better-than-expected business confidence data. In the US, attention turned to a report on Durable Goods, which showed a drop of 1.3 percent in August, which was not as bad as the 1.4 percent decline that economists had expected. Excluding transportation, orders rose 2 percent and much better than the .6 percent that economists had expected. Separate data released later showed New Home Sales flat at an annual rate of 288,000 in August, which was roughly in-line with expectations. The Dow Jones Industrial Average opened higher on the Durable Goods report and held its gains through the New Home Sales numbers. The rally was extended into midday and, at the closing bell, the Dow was up had tallied a 198-point gain. It finished 8 points off session highs.

Bullish Flow
Amkor Technology (AMKR) had a good day amid strength in the semiconductor names Friday. The PHLX Semiconductor Index (.SOX) finished up 13.31 to 346.14. Meanwhile, AMKR, a Chandler, AZ specialized semiconductor company, added 9 percent to $6.50 per share and options volume jumped to 18X the norm for AMKR. November 7 calls were getting most of the attention. 4,800 contracts traded and, with 90 percent trading at the ask, according to website WhatsTrading.com, the action seems to have been dominated by call buyers. The bullish trading might be in reaction to the relative strength in the stock and the fact that shares are breaking above previous resistance levels around $6.30. There was no company specific news to explain the action.

Bullish flow was also detected in General Mills (GIS), CSX, and Blackstone (BX).

Bearish Flow
AMAG Pharmaceuticals (AMAG) shares lost 65 cents to $18.24 after Jefferies analysts lowered their price target on the stock to $18 from $32. The revision seems to have weighed on the stock price Friday and options volume rose to 29X the usual, with 9,980 puts and 6,450 calls traded on the ticker. October 16 and 18 puts were the most actives, with one or more investors apparently opening backspreads – selling the 18s at roughly $2 and buying twice as many of the 16s at 85 cents. This spread is initiated at a credit (2 - .85 - .85), which the strategist keeps if shares stay above $18 and all puts expire worthless at the expiration. However, profits are also possible if AMAG sees a substantial fall between now and then October expiration.

Bearish flow also picked up in KB Homes (KBH), ADM, and Ericson (ERIC).

Index Trading
The CBOE Volatility Index (.VIX) came under pressure Friday after the S&P 500 Index (.SPX) rallied 23.84 points to 1148.67. The S&P 500 closed at its best levels since May and VIX lost 2.12 points to 21.75 on the session. Overall index volume has been light this week, as investors are reluctant to pay for portfolio protection (i.e. index puts) in the current market environment; which can be characterized as a steady grind higher during the month of September. About 351,000 calls and 413,000 puts traded on the SPX and other cash indexes Friday, which is only about 70 percent the recent average daily volume. Light volume in the index market and falling volatility is a sign of diminishing fear and increasing confidence among investors.

ETF Trading
While falling VIX is a sign that fear is easing a bit, at least one big investor seems to be bracing for an uptick in market volatility in the weeks ahead. The largest options trades Friday were in the SPDR 500 Trust (SPY), or Spiders. Shares of the fund add $2.32 to $114.82 and the trade was in the October 110 – 108 put spread after one strategist apparently bought 50,000 Oct 10 puts at 81 cents and sold 50,000 October 108 puts at 52 cents. The massive spread, at a 29-cent debit, might be a short-term hedge as it makes its best profits if SPY falls to $108, or about 6 percent, from now through the October expiration. It's short-term because October options expire in three weeks.