Late Pop Impressive 07-20-2010

Cusick’s Corner
This nice pop into the After Hours is impressive. Almost every sector is up and bouncing off mid-term support (50-Day Moving Average) and on decent volume, but be careful not to get too caught up in the emotion of this move. The afternoon move started to look more like a potential short covering rally and we should not forget that the market is still entrenched in the downtrend. We could see the market take an even more meaningful run to the upside if we take out the July highs, S&P September E-Minis 1085 level. Apple (AAPL) reported earnings, beat by .40 cents! I am picking through the report now, but the stock is up after the close and the futures have held above 1080, so I want to see the market’s reaction overnight.

The major averages battled back from early losses and grim housing news to stage an impressive midday reversal Tuesday. The table was set for early weakness at the opening bell after a number of high profile names like IBM, Texas Instruments (TXN), and Goldman Sachs (GS), slipped on disappointing earnings news. Making matters worse, data released early Tuesday showed Housing Starts falling to an annual rate of 549,000 in June, down from 578,000 the month before and well below economist estimates of 575,000. Yet, the early decline was orderly and without any clear fundamental catalyst to explain the turn around, the major averages strengthened after midday. From there buying interest developed further and the Dow finished the day up 73 points and 222 points from its worse levels of the day.

Bullish Flow
BJ’s Wholesale Club (BJ) saw a midday spike and finished the day up $1.09 to $44.91. As shares notched new 52-week highs, options volume surged to 7X the average daily. 9,690 call options traded in the name, or more than 10X the number of puts. August and September 50 calls were the most actives. August 45 and September 40 call options saw interest as well. The bullish trading in BJ comes one day after SAC Capital Advisors disclosed a 4.5 percent passive stake in the company.

Bullish order flow was also seen in American Tower (AMT), Weatherford (WFT), and Sara Lee (SLE).

Bearish Flow
Goodyear Tire (GT) added 25 cents to $11.32 Tuesday, but trading in the options market seemed somewhat defensive with 2745 puts traded on the tire maker. The volume represents 3X the normal and compares to 478 call options. The top trades included two blocks of January 10 puts, totaling 2,600, at an average of $1.175 per contract. The puts traded on the ISE, where sentiment data indicate the trades are opening customer buyers. If so, it might be speculation that the stock will fall throughout the rest of the year or possibly hedging activity heading into a July 29 earnings release.

Bearish flow also picked up in Mannkind (MNKD), Live Nation (LYV), and RadioShack (RSH).

Index Trading
Trading volume was relatively quiet in the index market, despite wide intra-day moves in the market averages Tuesday. The S&P 500 Index (.SPX) traded in a 28-point range and finished the day up 12.2 points. About 534,000 puts and 333,000 calls traded across the SPX and other cash indexes. The top trades of the day were in the CBOE Volatility Index (.VIX). The VIX finished the day down 2.04 to 23.93 and one investor apparently sold the July 27.5 – September 25 put spread at 45 cents, 36000X. That is, they sold (probably closing) the July 27.5 puts to buy September 25 puts (probably opening.) VIX is down 30.7 percent month-to-date and this strategist was probably extending a bearish view on the index through September.

ETF Trading
US Natural Gas Fund (UNG) added 14 cents to $7.74 Tuesday after natural gas prices (August) added 8 cents to $4.59 per BTU. In the options market, impressive volume was seen in UNG August 7 puts. More than 110,000 contracts traded, including large blocks traded on the bid price of 15 and 16 cents. These put sellers appeared to be initiating new positions because existing open interest is about 18,000. If so, it’s a bullish play or a bet that shares of the fund, which track natural gas through futures, will hold above $7 through the expiration.