Formula for a Bull Market 11-05-2010

Cusick's Corner
There was no lack of positive catalysts for the bull this week. At this stage, the best scenario for a thriving Bull market and signal of a potentially stronger economy is  rising Earnings + falling Inflation + low Interest rates = Prices going up. But the presumption is that the economy is strong, insiders will be monitoring this in the coming months, looking for any potential road block or break in strength. As traders, we want to keep a keen eye on the trend and as long as the inputs, EIIP, continue to follow suit, this upside trend is very much in play. Have a good weekend and see you Midday.

The underlying tone of trading remained positive with help from better-than-expected jobs data Friday. After a 220-point surge Thursday, the Dow Jones Industrial Average opened steady when the Labor Department reported a surprise jump in job creation during the month of October. The data showed the US economy adding 151,000 payrolls last month, which was significantly better than the 60,000 increase that economists had expected. The rate of unemployed remained unchanged at 9.6 percent, which was in-line with estimates. Average hourly earnings rose .2 percent and twice as much as expected. After the big rally Thursday, the Dow wavered at the open and was little changed into midday. However, thanks to a late-day round of buying interest, the industrial average was able to build on Thursday's gains. It finished the day up 9 points. The NASDAQ added 1.6.

Bullish Flow
Las Vegas Sands (LVS) has seen some wild action in recent days. Shares had a 10-day 37 percent winning streak going into today's trading session. The rally continued through early afternoon and LVS touched a new 52-week high late in the day. From that point forward, however, an aggressive round of selling pressure surfaced. At the end of the day, shares had lost 3 cents to $51.98 and finished down 6.3 percent from session highs. However, while shares tanked in late trade, the overall options order flow seemed to reflect the bullish sentiment that has infected Las Vegas Sands in recent days. 258,000 calls and 136,000 puts traded on the casino operator, or 4X the recent average daily volume for LVS. November 55, 57.5, and 60 calls were among the most actives.

Bullish options action was also seen in Human Genome Sciences (HGSI), Allscripts (MDRX), and Fluor (FLR).

Bearish Flow
Governor Company and Bank of Ireland (IRE) didn't participate in the market advance Friday. Shares of the Irish regional bank touched a new 52-week low and lost 28 cents to $2.58. Meanwhile, options volume rose to 18X the average daily for IRE. 3,870 calls and 2,860 puts traded in the name. Most of the activity was in smaller lots. The top trade was a lot of 472 December 2 puts at the 15-cent asking price. Meanwhile, implied volatility surged nearly 80 percent to 121. So, although the options flow wasn't entirely bearish, the weakness in the shares and surging implied volatility seems to reflect some underlying concerns about the outlook for this Irish bank.

Bearish flow also picked up in Ensco (ESV), Sanofi (SNY), and San Juan Basin Royalty Trust (SJT).

Index Trading
The KBW PHLX Bank Sector Index (.BKX) saw relative strength and increasing options volume Friday, the day after the Fed said they might allow banks that meet certain capital requirements to increase dividends. The prospect of increasing dividends has been driving shares of some of the banking names higher and BKX, which is a cash-settle index that tracks the price action of America's leading banks, finished up 1.03 to 48.69. Meanwhile, early options trades Friday included a block of 40,000 March 52 calls at $2.25 per contract on the ISE. It was an opening buyer, according to data from the exchange. Another 30,000 traded on the PHLX, also at $2.25 per contract. This massive premium purchase seems to be a bet that the banks can continue their winning ways through March 2011.

ETF Trading
It was a day of very heavy trading in some of the financial exchange-traded funds. For example, in the Financials Select Sector Fund (XLF), 480,000 calls and 138,000 puts traded on the day, or 3X normal. Shares finished up 35 cents to $15.58. Meanwhile, in the Direxion Daily Financial 3X Shares (FAS), 113,000 calls and 56,000 puts traded on the fund, or 3.5X the average daily. Shares of the leveraged fund added $1.40 to $26.48. The heavy call volume in these two funds reflects the bullish sentiment that has surfaced in the sector after the Federal Reserve said Wednesday afternoon that it was buying $600 billion in bonds and pledged to keep rates low for an “extended period of time.” News late Thursday that the Fed will also allow some banks to raise dividends seemed to help sentiment in the financial sector this week as well.