Negative 50/200 Cross Needs to Reverse 07-08-2010

Cusick’s Corner
Trading was in a tight range today and major markets closed up. With all the positive commentary and action in the market (especially how it held up after the Consumer Credit data), don’t put on rose colored glasses and simply be complacent with this new trend. We have a lot of negative trends to reverse -- 50/200 Cross and downside sloping resistance 113 on the SPY. There are a few facts to consider: the amount of money still on the sidelines, shorts continue to be pressed, plus the AAII (largest independent investors group) registered its strongest bearish sentiment rating. Now, this AAII rating has also been a solid signal for a potential and meaningful market shift in the past and it’s starting to look like being long may not be so wrong. Be measured and scale into positions with tight risk and capital management rules in place. See you Midday.

Stocks opened higher on better-than-expected weekly jobless claims numbers, traded mixed into midday, and then saw a rally late in the session to close with solid gains. The table was set for market strength Thursday morning after the Labor Department reported that filings for jobless benefits fell by 21,000 to 454,000 in the week ended July 3. Economists were looking for a decline of about 15,000. The Dow Jones Industrial Average, which rallied 275 points the day before, extended the advance and was up nearly 100 points in morning trading. However, the rally fizzled and the Dow was up only 35 points midday. The NASDAQ had fallen into the red. With little news to guide the action, trading turned choppy until the final hour. Then, another wave of buying interest surfaced and the Dow was up 121 points at the closing bell. The NASDAQ added 16.

Bullish Flow
Madison Square Garden (MSG) options saw heavy trading ahead of Lebron James’ announcement Thursday evening. The basketball star is expected to announce his decision about his future in the NBA and there has been some speculation it will be with the New York Knicks, which would certainly be a boost to the Madison Square Garden. However, MSG shares lost $1.19 to $20.38, as media reports now suggest that a move to the Miami Heat is more likely. Meanwhile, in the options market, players actively jockeyed for position ahead of the news, with more than 28,000 July 22.5 calls traded on the session. July 20 puts saw brisk trading as well.

Bullish order flow was also seen in Procter & Gamble (PG), Monster Worldwide (MWW), and Yahoo (YHOO).

Bearish Flow
Mechel Open Joint Stock Company (MTL) added 19 cents to $19.22 and options volume hit 4.5X the average daily, with 7,700 puts and 485 calls traded on the Russian steel and iron company. The top trade was a block of 3,300 August 17.5 puts at $1.10, which looks like an opening buyer. More than 5,000 traded total. Another 1,445 July 17.5 puts traded and implied volatility rose about 2 percent to 65, as some players seemed to be buying these out-of-the-money puts on concerns about possible losses in the share price during the weeks ahead.

Bearish flow also picked up in Urban Outfitters (URBN), Dollar General (DG), and Western Digital (WDC).

Index Trading
Trading in the index market remains relatively quiet despite wide swings in the market lately. After a 275-point rally Wednesday, the Dow Jones Industrial Average jumped another 121 points Thursday. Yet, in the index market, about 400,000 calls and 444,000 puts traded across all the cash indexes, which is only 75 percent the recent average daily volume. It doesn’t seem like many investors expect the volatility to continue in the weeks ahead. As evidence, not only is volume light, but also the CBOE Volatility Index (.VIX) fell 1.13 to 25.71 Thursday. 63,000 call options traded on the volatility index which is about 63 percent the recent average daily volume.

ETF Trading
iShares Taiwan Fund (EWT) saw noteworthy trading activity. Shares edged up 4 cents to $11.96 and options volume hit 28X the recent average daily after one investor sold the December 11 – 13 strangle at $1, 10000X. The strategist sold 10,000 December 11 puts at 57 cents and bought 10,000 December 13 calls at 43 cents, which seems to reflect expectations for range bound trading during the months ahead. At $11.96, the share price is almost exactly midway between the strike price of the calls and the strike price of the puts.