S&P Waffles Around Key 1050 Level 08-31-2010

Cusick’s Corner
The market waffled around key S&P support-resistance levels of 1050 and remains under pressure due to the uncertainty over the data that’s coming out during the rest of the week. One factor potentially holding this market up today may be a byproduct of a little end-of-the-month window dressing by managers. The energy complex came under some pressure shortly after the open in front of the Crude Inventories tomorrow. Precious metals like SLV and GLD were also on the move, most likely as a safety trade. There is still plenty of emotion leading up to the Employment data and the long weekend, so this market is not for the faint of heart. Stay disciplined and only trade if you have a plan. See you Midday.

The major averages finished the month of August in uninspired fashion Tuesday. Stocks traded higher through midday after data released early showed the Case- Shiller 20 City Index up 4.23 percent in June and better than the 3.1 percent increase that economists had predicted. Later, the Chicago PMI showed a drop to 56.7 in August, down from 62.3 the month before. Economists were looking for the gauge of manufacturing activity to fall to 57. However, the latest Consumer Confidence Index surprised to the upside, increasing to 53.5 in August; from 51 in July and much better than the 50.0 reading that economists were anticipating. The Dow Jones Industrial Average rallied on the consumer confidence headline, but the gains had been lost by early afternoon. From there, trading was slow and somewhat sloppy. By the closing bell, the Dow was able to move back and settle up for a modest 5-point gain to 10,015. The industrial average lost 451 points during the month of August.

Bullish Flow
Omnicare (OCR), a Covington, KY pharmaceutical services company, finished Tuesday’s session down 28 cents to $19.20 and options volume hit 2.5X the average daily, with about 10,000 calls and 515 puts traded on the session. Most of the action was due to one spread trader. They apparently initiated a bullish March 25 – 30 call spread at a 63-cent debit, 4850X. A total of 5000 changed hands. Omnicare shares have been reeling since the company reported disappointing earnings on August 5, down 24 percent since that time. This investor might be looking for a rebound through the end of this year and into early 2011 and is buying 25 calls while selling the 30s to help finance part of the purchase.

Bullish flow was also detected in Dean Foods (DF), Newmont Mining (NEM), and Saks (SKS).

Bearish Flow
Put volume picked up in H&R Block (HRB), as shares got pounded to new 52-week lows Tuesday. HRB finished the day down 54 cents to $12.83 and options volume surged to 20X the average daily. A whopping 45,000 puts traded on the tax preparation company, which is 23X the normal and compares to 6,920 calls. October 10 puts were the most actives. 22,660 changed hands. There were no company specific headlines to explain the bearish trading. It might be due to anxiety ahead of the company’s earnings release later this week.

Bearish flow also picked up in Research in Motion (RIMM), Caterpillar (CAT), and Atmel (ATML).

Index Trading
There’s not a lot going on in the index market these days. Overall volume is light. About 327,000 calls and 432,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes Tuesday, which is about 79 percent the recent average. The SPX traded in a 15-point range and finished up just .41 points. There’s not much volatility. The 20-day statistical volatility of the S&P 500 is now just 16.3 percent. The market simply isn’t making very big swings from one day to the next. However, the CBOE Volatility Index (.VIX), which fell 1.16 to 26.05 Tuesday, remains in the mid-20s and therefore the market is pricing in the possibility for an uptick in volatility during the weeks ahead. VIX is a measure of volatility based on S&P 500 Index options prices and is therefore a forward-looking gauge of market volatility. When VIX is substantially higher than actual volatility, as it is now, it means options investors expect higher levels of volatility in the future (relative to the past).

ETF Trading
Energy Select Sector Fund (XLE) lost 14 cents to $51.20 after crude oil (December) tumbled $2.78 to $71.92 Tuesday. In XLE options, a noteworthy trade surfaced in morning action after one strategist apparently initiated a bullish spread, buying 20,000 December 57 calls at $1.02 and selling 20,000 December 62 calls at 23 cents each. The spread, at a 79-cent net debit, is a bullish play on energy-related companies. It make its best profits if the fund, which holds all of the energy-related components of the S&P 500, rallies to $62 or beyond by the December expiration.