High Beta Stocks & Appetite for Risk 01-05-2011

Cusick's Corner
The market hit the day's highs in the afternoon, but one flag is that Commodities (OIH), Retail (XRT), and Tech (SMH) are all lagging the market's push to the upside. I know that lately I been stressing that Volatility will be key to watch, but also monitor the performance of offensive sectors that sometimes have a higher beta. The sectors mentioned above have underperformed the general markets, SPX and QQQQ, which could be showing us that traders are not building their positions in higher beta stocks. In other words, there is less appetite for risk. This also puts a spotlight on the employment number Friday. If it is really positive, this could change the actions of the Fed, thus bond markets could really see some volatility. Watch the Claims tomorrow pre-market to see if they continue to drop in claims testing the 400k market. See you Midday.

Major averages finished with modest gains with help from better-than-expected economic numbers Wednesday. Before the opening bell on Wall Street, ADP reported that the private sector added 297,000 jobs last month. Economists were looking for an increase of only 100,000. Separate data released later showed the ISM Index of non-manufacturing activity up to 57.1 in December, its best levels since 2006. Economists were looking for the Services Index to increase to only 55.7, from 55.0 the month before. The early reaction to the data was lackluster, but both the Dow Jones Industrial Average and the NASDAQ had moved to higher ground by midday. But there still isn't much volatility. The Dow traded in a 90-point range and finished with a 32-point gain. The NASDAQ added 21.

Bullish Flow
TJX Companies (TJX), a Framingham, MA apparel department store chain, finished the session down 58 cents to $43. Meanwhile, options volume increased to 11X the average daily. 8,150 calls and 2,795 puts traded. January 44 calls were the most actives. 4,620 traded. Another 1,090 January 45 calls changed hands. In addition, more than two-thirds of the call volume traded at the asking price, according to data from web site WhatsTrading.com. So it looks like bullish traders were dominating the action and buying calls in TJX, perhaps looking for good news in the near-term. Many retailers are releasing monthly same store sales results Thursday morning.

Bullish order flow was also seen in Applied Materials (AMAT), TIVO and Goodyear Tire (GT).

Bearish Flow
An interesting spread trades in Abercrombie (ANF) Wednesday. Shares finished down 87 cents to $55.35 and one investor apparently sold 1,900 August 70 calls at $2.30 to buy the August 35 – 50 put spread at $3.93, 1900X. The three-way play, for a net debit of $1.63, is a bearish position as it makes its best profits if shares sink all the way down to $30. It has additional risk to the upside because the August 70 calls were sold and not covered. Like TJX, the positioning in ANF options might be a play on tomorrow's same store sales numbers. An investor looking to hedge their shares in Abercrombie might have initiated the spread.

Bearish flow also picked up in American Eagle Outfitters (AEO), Sprint (S), and Omnicare (OCR).

Index Trading
Trading activity in the index market has picked up a bit in early 2011. 575,000 calls and 559,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is about 125 percent the recent average daily volume, according to Trade Alert data. The top trades were in the CBOE Volatility Index (.VIX), which lost .36 to 17.02. In this trade, the investor apparently sold 15,000 January 37.5 calls at a nickel and bought 15,000 March 30 calls at $1.35. The spread is probably a roll of bullish calls from January to March and down to the 30s from the 37.5 strike price. The investor was probably looking to salvage the last remaining nickel of time value in the January calls, but keep bullish exposure on VIX through March.

ETF Trading
SPDR KBW Bank ETF (KBE) saw heavy trading Wednesday. Shares finished the day up 39 cent to $26.81. 24,000 calls and 2,230 puts traded on the fund. The top trades were in the January 25 and 27 calls. For example, the spread traded at $1.23, 4900X, and at $1.22, 4900X. This Jan 25 – 27 spread traded 10,000 contracts total and is likely rolling up in strikes. That is, the investor is selling the January 25s, which are now $1.81 in-the-money, but maintaining a bullish position by opening a new position in the at-the-money January 27 calls. They might have banked a profit and looking for the run in the ETF to continue over the next two and half weeks. January 2011 options expire in 16 days.