Late Summer Squeeze 08-25-2010

Cusick’s Corner
The market did something this afternoon that it has been unable to do in the last three sessions, finish strong to the upside. Another positive about this close -- the shorts succumbed to an upside squeeze. There is some new concern in Japan, EWJ -- the Yen, FXY, has been on a tear which will in turn impact exports and potentially slow economic growth. Monitor this currency and the potential implications if the Japanese government comes in and tries to slow the upside pace by selling Yen. Watch the Claims data tomorrow and pay close attention to the Mortgage Delinquencies and MBA foreclosures. The employment data is already a known, what is not is whether delinquencies and foreclosures are on the move in the wrong direction. See you Midday.

The major averages overcame early losses and finished modestly higher Wednesday. After a 134-point loss Tuesday, the Dow Jones Industrial Average opened lower after data showed Durable Goods increasing just .3 percent in July. Economists were looking for an increase of 3 percent. The Dow continued trading lower through a report on housing, which showed New Home Sales falling to an annualized rate of just 276K in July, down from 315K the month before and much worse than the 334K that economists had been expecting. However, trading had turned mixed shortly after midday and then the major averages staged a modest late-day run higher. The Dow Jones Industrial Average settled up 20 points higher at 10,060 and 121 points from session lows.

Bullish Flow
Sprint Nextel (S) added a penny to $3.96 and call volume rose to about 27,000 contracts. The volume is double normal and compares to 5,690 puts. Upside call buyers dominated the action in November 5 calls, with 6,036 traded and 94 percent trading at the Ask. September 4, October 4, and January 5 calls were busy as well. There was no news to explain the sudden rush of call activity in the phone company. It might be the work of speculative players betting that shares will rebound from a one-month 21.6 percent slide.

Bullish flow was also detected in J Crew (JCG), Citi (C), and American Eagle (AEO).

Bearish Flow
Genco Shipping (GNK), the New York-based ocean shipper, lost 46 cents to $15.16 and has now tumbled nearly 50 percent from the highs seen in November of last year. Looks like some investors might be concerned about additional losses in the weeks ahead as September and October 14 puts saw heavy trading Wednesday. The Sep 14s were the most actives with 4,850 traded and with 73 percent trading at the ask -- looks like buyers were dominating the action. Implied volatility finished up 7 percent to 59 which is also consistent with put buying.

Bearish flow also picked up in Apollo Group (APOL), Cadence Designs (CDNS), and United Healthcare (UNH).

Index Trading
The PHLX KBW Bank Sector Index (.BKX) hit a low of 42.70 and battled back to close down .18 to 43.41. Options volume hit 62X the normal for the index, with about 8,000 calls and 9,180 puts traded on the day. Most of the action appears to be the work of one trader buying large blocks of November 45 calls at $2.49 while selling blocks of November 42 puts at $2.89. The options traded on the ISE, where ISEE sentiment data confirm that the calls were being bought, but not the puts. If so, this strategist is bullish on the banking sector and is selling puts to finance calls on the BKX. There’s a risk, however, if the index loses value. If so, the puts will increase in value and the strategist might face assignment at expiration. In the case of a cash index, the settlement involves the transfer of cash, which will be equal to the difference between the strike price and the settlement value at expiration.

ETF Trading
Energy Select Sector Fund (XLE) lost 16 cents to $51.24 even after crude oil overcame early losses and finished up $1.26 to $72.89. Crude hit a low of $70.76 on bearish inventory data Wednesday. XLE, which is a fund that holds shares of energy-related companies, didn’t fully recover. Meanwhile, in the options market, a noteworthy trade in the ETF was a September 49 - 52 strangle at $1.84, sold 10000X on AMEX. The investor sold both the September 49 puts and the 52 calls, possibly looking for shares to hold between $49 and $52 through the September expiration (23 days).