Tough to Read Market's Current Tea Leaves

Cusick’s Corner
The market is giving us little to draw from, not telling us which way it wants to tilt. With trade volume thin and Housing data around the corner, the potentially best course is to trade conservatively and be very aware of the choppy nature of this market. Keep an eye on the retailers that are announcing this week to get a better picture of the consumer and retail markets. See you Midday.

Market action was quiet Monday with little new information to guide trading. The earnings calendar is slowing and the only report of significance to start the week was an earnings release from improvement retailer Lowe’s (LOW). Shares finished flat after the company failed to deliver positive guidance for the rest of 2010 and instead noted that it sees no recovery until 2011. Meanwhile, the day’s economic news wasn’t so stellar either. While the latest NY Empire State Index rose a bit less than expected in August (7.10 vs. 7.5 consensus), a separate report showed an index of homebuilder confidence falling to a 17-month low of only 13 (vs. 14 consensus). Yet, at the end of the day, the data didn’t seem to matter much, as the Dow Jones Industrial Average spent most of the session chopping around and finished almost flat, down just 1-point on the day. The NASDAQ gained 8.4.

Bullish Flow
Dynegy (DYN) saw a second day of bullish trading. As noted in the previous wrap, shares rallied $1.75 to $4.53 Friday on news private equity firm Blackstone is making a move to buy the power company for $4.7 billion, or about $4.5 per share in cash. About 94,000 call options and 5,420 puts traded on the news Friday. The action continued Monday, with another 67,000 calls and 16,000 puts traded in the name. The action included buyer of 10,000 contracts at 20 cents. This strategist might also be looking for another bidder to emerge and pay something north of $5.20 for Dynegy. Shares finished Monday up 21 cents to $4.74 and already 24 cents above Blackstone’s current offer.

Bullish flow was also detected in Oracle (ORCL), GT Solar (SOLR), and Marvell Technology (MRVL).

Bearish Flow
Salesforce.com (CRM) saw increasing options activity ahead of its earnings, due out Thursday at the close of trading. Shares lost 61 cents to $96.63 and options volume hit 4X the recent average daily, with about 15,000 puts and 7,380 calls traded in the online retailer. The top trade was a spread, in which an investor bought 5,900 September 95 puts at $5 and sold 5,900 September 85 puts at $1.85. This spread, at a $3.15 net debit, might be to hedge to position in shares should the stock fall if CRM fails to deliver good earnings.

Bearish flow also picked up in L3 Communications (LLL), Devry (DV), and Corinthian Colleges (COCO).

Index Trading
Trading was mixed Monday. The S&P 500 (.SPX) traded in a 13-point range and finished up just .13 to 1079.38. Overall volume picked up a bit, as about 433,000 calls and 497,000 puts traded on the SPX and other cash indexes. However, the tone of trading didn’t seem to reflect any strong bullish or bearish sentiment. In fact, the CBOE Volatility Index (.VIX) edged down just .15 to 26.09. VIX rallied 20.7 percent last week and closed at its best levels so far in August on Friday. Yet, although VIX rallied as stocks faltered last week, actual levels of volatility remain rather low. The 20-day statistical volatility of the S&P 500, which is a measure of past price movement, is only 18.4 percent and therefore significantly below the VIX. Therefore, relative to realized volatility, VIX is high at current levels.

ETF Trading
iShares DJ US Home Construction Index Fund (ITB) lost 2 cents to $10.90 following another dose of grim housing data Monday. According to the National Association of Homebuilders (NAHB), confidence among builders is at 17-month lows. The index, which is released monthly, showed a drop to 13, from 14 the month before and below economist estimates of 14. One player in the options market seems to be bracing for additional weakness in the building sector after today’s news and implemented a put spread on ITB, selling 1,200 August 12 puts and buying 4,000 September 10 puts. This looks like a roll out of August and into larger position in September puts at a lower strike. It’s a bearish bet on the ITB and therefore a bearish play on the homebuilding names. ITB is a fund that holds shares of homebuilders like Toll Brothers (TOL), Pulte Homes (PHM), and Lennar (LEN).