Risk Appetite Back 06-15-2010

Cusick’s Corner
The market kept its head of steam into the close above long-term resistance, 1108 on the S&P. The appetite for “Risk” seems to be back. As noted in the Midday, we need to see follow through and we did, especially in large cap Tech, QQQQ, plus there was some volume which is encouraging. This leaves the market set up for some potential follow through, but we will have to wait and see how Asia opens overnight and how the Housing/PPI number rolls out pre-open. This could be the start of a potential rally into the summer, but it’s best to be conservative in this sometimes volatile environment. Talk more about that tomorrow, see you Midday.

Stocks rallied around strength in the euro and despite a round of mixed economic data Tuesday. The Dow Jones Industrial Average moved up early after European markets traded mostly higher and the euro recaptured the 1.23 level against the buck. The gains in the euro and euro-zone stocks followed news of a successful round of euro-zone debt auctions. The domestic news was mixed, however, after data released before bell showed import prices falling .6 percent in May, suggesting the low inflation/low interest rate environment remains. A separate report on the NY Empire State Index (of regional manufacturing activity) improved to 19.57 in June, from 19.11 in May and not far from economist estimates of 20. However, the latest NAHB Homebuilders Index disappointed, falling 5 points to only 17 in June. Yet, the euro continues to drive a lot of the action and, as a result, the rally in the currency helped fuel some upside momentum in the Dow, which finished up 214 points Tuesday. The NASDAQ added 62.

Bullish Flow
Pfizer (PFE) shares gained 19 cents to $15.52 and some large blocks of PFE puts and calls traded late in the day. One investor appears responsible for the flow, after 60,000 December 17 calls traded at the asking price of 49 and 51 cents per contract. Meanwhile, another 30,000 December 15 puts traded for $1.12 and $1.16. The action has the characteristics of a bullish 2X1 risk reversal, where the strategist bought 60,000 of the calls and helped finance the trade by selling half as many of the puts. They might be buying calls on hopes for a rally, but also willing to buy PFE if it’s trading below $15 (or the strike price of the put) when the December options expiration approaches.

Green Mountain Coffee Roasters (GMCR), Watson Pharmaceuticals (WPI), and UAL (UAUA) also had bullish flow.

Bearish Flow
The overall tone of trading was bullish Tuesday and there aren’t many bearish stories to report, but Airgas (ARG), an industrial equipment company, was the subject of some noteworthy spread trading. Shares finished the day up 64 cents to $63.39 and this strategist apparently sold 1,000 January 70 calls at $1.90 to buy the October 45 – 60 puts spread at $2.90, 1000X. This strategist might see limited upside through January, but is also bracing for potential downside volatility through the October expiration. The overall spread, at a $1 net debit, might also be a hedge to protect a position in ARG shares.

Bearish flow also picked up in Vivus Pharmaceuticals (VVUS), NetApp (NTAP), and Websense (WBSN).

Index Trading
The PHLX Semiconductor Index (.SOX) rallied 19.5 points to 371.47 on a good day for the technology sector Tuesday. SOX is a cash-settled index that tracks the price action of Intel and 18 other semiconductor stocks. Options action picked up in the index as well. July 380 call options were the most actives, with some investors apparently taking new positions in anticipation of a rally beyond 380.00 through the July expiration. Some of the action might be rolling out of in-the-money June call options, as the June 345 and 350s were apparently being sold Tuesday. About 3,000 calls and 240 puts traded on the SOX, or 2.5X the typical volume for the index.

ETF Trading
Trading was relatively quiet in the ETF world, with about 2.2 million calls and 3.1 million puts traded across all the exchange-traded funds. Investors seem less concerned about market volatility and, in the ETFs, there has been a substantial decline in protective put buying in recent days. However, some institutional players are still hedging their bets. For example, in afternoon trading Tuesday, one player bought 16,000 SPY December (Quarterly) 100 puts and sold 16,000 December (Quarterly) 80 puts. This 100 – 80 put spread, at a $2.10 debit, is likely to hedge a portfolio from now through the end of the year. Quarterly options expire at the end of each quarter. Meanwhile, S&P Depositary Receipts (SPY) finished the day up $2.49 to $112 per share.