Financials Needed to Keep Momentum 07-15-2010

Cusick's Corner
Leak is plugged, delinquencies are down and you can still fix a 4G phone with duct tape -- all is good with the world. As I write this, Google (GOOG) reported earnings of $6.45, impressive, but short of estimates that were .07, so the stock is trading down after the close. Goldman Sachs (GS) jumped after the close when news hit that it will pay $550 million to settle the SEC lawsuit concerning investors in the Abacus CDO. GS is now trading over $153 in the Extended Hours session while it closed at $145.22 on the NYSE. Also keep an eye on the Citi (C) and Bank of America (BAC), this could give us better insight into whether the Financials will continue to lead this Market, we’ll need them to if we want to continue this upside momentum towards resistance, 1100 on the SPX. See you Midday.

Stocks battled back from early weakness and disappointing economic news to finish mixed Thursday. The major averages held steady in early trading after JP Morgan (JPM) delivered better than expected earnings and the latest weekly jobless claims numbers showed a decline of 29,000, and much better than the 8,000 drop that economists had predicted. However, the underlying tone was cautious after the latest Producer Price Index [PPI] showed a drop of .5 percent in June (vs. .1 percent estimate) and the NY Empire Manufacturing Index for July slid to just 5.08 from 19.57 (vs. 18 consensus). Then, the major averages extended their losses at 10:00 ET when the latest Philadelphia Fed Survey for July sank to only 5.1, down from 8 the month before and much worse than the 10.1 that economists had expected. However, after trading lower throughout most of the session, the Dow Jones Industrial Average saw a burst of life late in the day and finished the session down just 8 points. The S&P 500 added 1.3.

Bullish Flow
Ford Motor (F) was the subject of an interesting spread trade Thursday. Shares finished the session up a nickel to $11.86 and one investor apparently bought the September 12 – 14 call spread at 59 cents, 10000X. That is, they bought 10,000 of the September 12 calls at 81 cents and sold 10,000 of the September 14 calls at 22 cents. This spread, at a 59-cent debit, offers a potential pay-off of $1.41 (excluding commissions) if shares of Ford rally to $14 (18 percent) or beyond by the September options expiration (64 days). It might be a bet that earnings will be a catalyst to lift shares higher. The automaker is due to release results later this month.

Bullish order flow was also seen in Potash (POT), Cisco (CSCO) and RadioShack (RSH).

Bearish Flow
Bearish traders surfaced in Colgate Palmolive (CL) Thursday. Shares lost 22 cents to $83.09 and options volume rose to 2.5X the average daily, with 5,010 puts and 527 calls traded in the name. The top trade was a block of 1019 August 75 puts at 50 cents on ISE, which was an opening customer buyer, according to ISEE data and in total 3,455 traded on the day. Another 803 August 80 puts changed hands. Some investors might be buying the puts on concerns about possible downside in the weeks ahead and this bearish trading might be related to earnings which are due July 29.

Bearish flow also picked up in Qualcomm (QCOM), Colgate Palmolive (CL), and Kellogg (K).

Index Trading
Trading was relatively active in the index market, with some players squaring positions ahead of the expiration. 638,000 calls and 553,000 puts traded across all the cash indexes. In the S&P 100 European Style Index (.XEO), 23,000 contracts traded – as some players were actively closing out positions in the July contract to open new ones in August. If any in-the-money contracts are held through expiration, they will be automatically exercised due to OCC rules. European-style options, like the XEO, can only be exercised at expiration. On the other hand, the S&P 100 Index (.OEX) and stock options settle American-style and can be exercised at any time prior to the expiration.

ETF Trading
Options volume picked up in Powershares Bullish Dollar Fund (UUP). The exchange-traded fund tracks the performance of the buck against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. It lost 28 cents to $23.97 and 34,000 UUP options contracts traded on Thursday. The top trade was a bearish play, where an investor apparently bought 5000 of the January 22 puts at 12 cents and sold 5000 of the January 25 calls at 47 cents. The bearish risk-reversal traded 10000X and appears to be a bet that the dollar will buckle before now and year end.