Big Money Yet to Buy Into July Rally 07-12-2010

Cusick’s Corner
The major indices held up into the After Hours, minus the small caps like RUT. This does not totally dampen the potential for upside, but it is putting traders a little more on the alert. Alcoa (AA) announced and beat by a penny but the market in the After Hours is muted, potentially signaling that the market has priced in some of the good news and is waiting to be surprised even further. Watch the 1075 level on the SPX downside to hold and 1085 on the SPX to be broken, which would potentially get some of the big money that is yet to buy into this July rally. See you Midday.

Major averages finished with modest gains on a relatively slow news day. With no economic data or earnings of importance to guide the action, the tone of trading was wait-and-see ahead of earnings from Dow component Alcoa (AA), which unofficially kicked off the reporting season with a release Monday afternoon. A number of other Dow stocks, including Intel (INTC) Tuesday, report earnings later in the week. Meanwhile, the economic calendar picks up midweek with Retail Sales and FOMC minutes due Wednesday. So, trading was a bit cautious ahead of the earnings and data. After sluggish trading throughout most of the session, the Dow Jones Industrial Average strengthened late in the day and finished up 18 points.

Bullish Flow
Yum Brands (YUM) saw active trading ahead of earnings. Shares of the restaurant company, which owns name brands like Taco Bell, Pizza Hut, and KFC, finished the day up 60 cents to $40.87. Options volume hit 8X the recent average daily, with some investors munching on YUM July 40, 41, and 42 calls. July 40 puts were actively traded as well. At the end of the day, 12,000 calls and 9,690 puts had changed hands. Implied volatility was up 18.5 percent to 32, ahead of the results which are due Tuesday after the closing bell.

Bullish order flow was also seen in Pride International (PDE), P&G, and Lowe’s (LOW).

Bearish Flow
An interesting three way spread in ResMed (RMD), a thinly-traded San Diego-based medical equipment company. Shares gained 42 cents to $65.35 and an investor apparently sold 1,000 August 70 calls at $1.00 to buy the August 60 – 55 put spread at 75 cents. This spread traded for a 25 cent net credit and seems to represent a bearish short-term view because it offers a max pay-off if shares fall to $55 by the August expiration, or 15.8 percent in 39 days. It might be to hedge shares around the company’s earnings which are expected in early August.

Bearish flow also picked up in Casey’s General Stores (CASY), Paychex (PAYX), and Cracker Barrel (CBRL).

Index Trading
The CBOE Volatility Index (.VIX) finished the day down .55 to 24.43 following a day of relatively slow trading Monday. The S&P 500 traded in a 10-point range and finished up .8. Volatility has been easing a bit over the past few weeks and it seems that some investors expect the trend to continue. More than 100,000 VIX August 25 puts traded Monday. The action included a buyer of 50,000 contracts at $1.40 each. The premium purchase, which represents a $7 million investment, is a bold move because the contract could expire worthless if VIX rallies back beyond $25 between now and the August expiration.

ETF Trading
Select Sector Basic Materials Fund (XLB) saw increasing action ahead of Alcoa’s earnings. XLB holds all of the material (metal, chemical, paper, etc) companies from the S&P 500 and Alcoa is the 10th biggest component in the exchange-traded fund. Some players seemed worried about the short-term outlook for the group, as 66K XLB puts traded Monday. One strategist apparently bought a block of 40.6K September 47 puts at 73 cents each. 42.3K contracts traded total. The position might not work out too well, however. Alcoa is up in after hours Monday after posting better-than-expected results and also raising estimates for aluminum demand.