Treasury Auction Results Adding Negative Tone 07-28-2010

Cusick’s Corner
The markets pulled back from their overnight highs, only to hold key support in the morning and waffle around breakeven into the Midday. This action, once again, comes under low volume. Hitting the headlines now -- current treasury auction results were better than expected in the 5 yr, pushing yields low which in turn seems to have put a slightly negative tone into the After Hours. Watch for some additional pressure in the Gold markets, potentially testing the $1145 mark. See you After Hours.

The major averages slumped on disappointing economic news, but the early decline was orderly and there hasn’t been much volatility through midday Wednesday. The table was set for early weakness on Wall Street after data released early showed orders for Durable Goods falling by 1 percent in June, which follows a .8 percent drop in May and was significantly worse than the 1 percent increase that economists had expected. Meanwhile, the day’s earnings news wasn’t so bright. While Sprint Nextel (S) gained 3.5 percent on the heels of its results, Aetna (AET), Newmont Mining (NEM), Comcast (CMCSA), and Dow component Boeing (BA) are seeing post-earnings weakness. Attention turns to the Fed’s Beige Book, a gauge of regional economic activity, this afternoon. The Dow Jones Industrial Average is down 20 points and the NASDAQ off 14 ahead of the news. The CBOE Volatility Index (.VIX) edged up .64 to 23.83. Trading in the options market is light, with about 2.5 million calls and 2.1 million puts traded through 11:00 ET.

Bullish
Large blocks of call options traded on the iShares Japan Fund (EWJ) after a strong rally in Japan’s equity markets Wednesday. The Nikkei rallied 2.7 percent and recorded its best single-day gain of the year, with help from the technology and electronics names after Canon posted strong earnings. In the US, EWJ is up 8 cents to $9.62 and the top trade is a block of 30,000 December 10 calls traded at the 34-cent ask price. Another block of 10,000 also traded at 34 cents and the action looks like call buyers opening new positions, probably looking for shares of the fund to rally beyond $10 by the December expiration.

Mechel Open Joint Stock Company (MTL), a steel and iron company, shares are down 26 cents to $22.04 and noteworthy spread traded in the name after an investor apparently bought 3,500 January 2012 17.5 call options at $8.15 and sold 3,500 January 2012 25 call options at $4.60. The spread, at a $3.55 net debit, looks like a new position and a bullish play on MTL. It makes its best profits of $3.95 (excluding commissions) if shares rally and hold beyond $25 through the January 2012 options expiration.

Bearish
Medco Health Solutions (MHS) is down $1.60 to $47.67 and falling to new 52-week lows. Shares took a hit on earnings news last week and appear to be reacting to disappointing results from Aetna (AET) and CVS today. Peer Express Scripts (ESRX) is due to release results today after market. The tone of trading is cautious throughout the sector and MHS is seeing increasing activity in its August 45 puts. More than 7,000 traded and nearly all traded at the 75-cent ask price. Meanwhile, implied volatility is up 18.5 percent to 32, as some players appear to be buying puts and bracing for additional volatility in MHS shares.

Mittal (MT) lost 55 cents to $31.47 after the steelmaker reported earnings that beat Street estimates, but the revenues that missed expectations. The company also warned that it expects to be impacted by slower demand in China over coming months. Shares are down and the news seems to have motivated a large purchase of put options on MT. In morning trading, a block of 8,250 January 26 puts traded at $2 even on ISE, where ISEE sentiment data indicate the trade is an opening customer buyer. With shares at $31.47, the stock would need to fall by 23.7 percent, to $24, for this strategist to break even at the January expiration.

Unusual Volume Movers
Broadcom (BRCM) options volume is running 4X the usual, with 37,000 contracts traded and put volume accounting for about 67 percent of the activity.

Range Resources (RRC) options activity is running 7.5X the usual, with 35,000 contracts traded and call volume representing 76 percent of the volume.
Symantec (SYMC) options volume is running 3.5X the usual, with 34,000 traded and call volume representing 98 percent of the activity.

Unusual volume is also being seen in Brocade (BRCD), Amylin Pharmaceuticals (AMLN), and CVS.

Implied Volatility Movers
Express Scripts (ESRX) implied volatility is moving higher ahead of its earnings, due out today after the closing bell. Peer Medco Health (MHS) tumbled 8.1 percent when it released results last week. CVS and Aetna (AET) are seeing post-earnings weakness today. This sector has been volatile and, consequently, some investors are bracing for a big move in ESRX. 8,470 calls and 6,580 puts traded in the name so far. Implied volatility is up 5 percent to 40 and has risen 12 percent in the past week.