Oversold Bounce in Bearish Market 07-06-2010

Cusick’s Corner
This is a nice bounce into the Midday after a great long weekend but it seems to be more of an oversold bounce in a bearish tending market. There is a lack of volume in key sectors -- Consumer Discretionary (XLI), Finance (XLF), Tech (XLK), and Industrials (XLI), plus there needs to be more conviction in 3 out of these 4 sectors if this rally has legs. The sellers look like they want to mount an attack into the After Hours (as I am writing this the S&Ps have given up over half the gains). Watch Gold (GLD) pull back, especially as it nears a key midterm support, the 50-Day Moving Average. See you After Hours.

The major averages are holding gains, as investors shrugged off a disappointing reading from the ISM Services Index and seemed to focus on a day of solid gains in overseas markets instead. Markets across Asia and Europe moved broadly higher early Tuesday after the Bank of Australia left rates unchanged and signaled optimism about the global economy. UK’s FTSE paced the advance across Europe with a 2.9 percent rally. Hong Kong’s Hang Seng rose 1.2 percent. In the US, there was little news to guide the action after the three-day break. The focus turned to the ISM Services Index at 10:00 ET. It showed a decline to 53.8 in June, from 55.4 in May and well below economist estimates of 55. The major averages showed little reaction to the numbers and the Dow Jones Industrial Average is up 105 points through midday. Meanwhile, options volume is respectable with about 3.2 calls and 3.3 million puts traded through 12:30 ET.

Bullish
CSX, the Jacksonville, FL railroad company, is seeing a second day of bullish trading. Investors were showing interest in July 50 and 52.5 calls Friday. Tuesday, CSX is up 26 cents to $47.96 and the action continues. 7,785 July 50 calls have changed hands. Another 1,590 August 52.5 call options also traded. 12,000 calls and 1,630 puts have traded so far. The bullish trading comes ahead of the company’s earnings report, due out July 12.

Wells Fargo (WFC) was the subject of noteworthy spread trading Tuesday morning. Shares, which had fallen some 25 percent since early May, are up 15 cents to $25.03. The spread trade was in the January 2011 calls, where an investor bought 3,750 Jan 29 calls at $1.71 and sold 2X as many, or 7,500, of the Jan 34 calls at 59 cents. This 1X2 ratio spread, at a 53-cent net debit is a bullish bet, as it makes its best profits if shares rally to $34, or 36 percent, by the January expiration.

Bearish
Ctrip.com (CTRP), a Shanghai, China travel services company, is off $5.47 to $32.60 and options volume is running 9X the average daily on talk Chinese airline companies are lowering commissions paid to travel agencies. 16,000 calls and 20,000 puts traded in the name through midday. The action includes 4,390 July 37 puts, with some well-timed buying at $1.60 in early trading. July 32 calls, January 25 puts, and January 30 puts are seeing active trading as well.

IShares Silver Fund (SLV) is up 3 cents to $17.49 after silver added 17 cents to $17.89 an ounce. SLV, which holds the white metal (stored in bank vaults), is seeing increasing options action as well. About 40,000 puts and 18,000 calls traded so far. August 15 puts are the most actives. 31,800 traded and, with two-thirds trading at the asking price, it looks like some large put buyers are dominating the flow in early trading.

Unusual Volume Movers
Home Depot (HD) options volume is running 2X the usual, with 56,000 contracts traded and call volume accounting for about 87 percent of the activity.

Fifth Third (FITB) options activity is running 6X the usual, with 40,000 contracts traded and put volume representing 94 percent of the volume.
Genworth (GNW) options volume is running 2.5X the usual, with 17,000 traded and call volume representing 98 percent of the activity.

Unusual volume is also being seen in Arena Pharmaceuticals (ARNA), Baker Hughes (BHI), and Retail HOLDRS (RTH).

Implied Volatility Movers
BP implied volatility continues to ease, as shares jump 6.7 percent Tuesday. The stock opened higher on an analyst upgrade and after the oil giant said its costs from the spill have surpassed $3.1 billion. Options trading remains brisk, with 65,000 calls and 51,000 puts traded in BP through midday. Implied volatility is down 3 percent to 70, and now well below the June highs of about 115.