Earnings Optimism 01-14-2011

Cusick's Corner
The market continues to get some more fuel early in this earnings cycle -- JPM and INTC reported to the upside, with little drag from the actions by the Chinese and the continued struggles of EU sovereign debt. Gold is on the radar because the short-term move looks potentially ugly, but if you look at some of the producers (Miners), especially the smaller names, they are holding up well. This does give long-term confidence in the metal but does raise a short-term red Flag. I will be keeping an eye on some key sectors and names next week -- SPX, INTC, SMH, UUP -- to see if the recent breakouts consolidate early or potentially fail on a short-term basis. The stock and options exchanges will be closed for trading Monday due to the Martin Luther King Holiday. See you Tuesday.

Major averages finished with gains, as earnings optimism seemed to overshadow mixed economic news. Data released early Friday showed retail sales up .6 percent in December, which was .1 percent less than expected. Meanwhile, the Consumer Price Index [CPI] rose .5 percent in December and .1 percent more than expected. The University of Michigan Consumer Sentiment Index fell to 72.7 in January, down from 74.5 last month and much worse than the 75.5 that economists were expecting. However, the latest Industrial Production report showed an increase of .8 percent and twice as much as expected. The mixed economic data seemed to set the stage for sluggish morning trading, but the Dow Jones Industrial Average was trading higher midday with help from JP Morgan (JPM). The bank released better-than-expected earnings Friday morning. Intel (INTC) also posted better-than-expected results late Thursday and the news help set a positive tone for morning trading in the chip stocks. Market averages were able to build on gains in the second half of trading. At the closing bell, the Dow was up 55 points and the tech-heavy NASDAQ had added 20.

Bullish
A number of insurance names saw bullish trading today. Progressive (PGR) was one of them. Shares of the Mayfield Village, OH property and casualty insurance company added 31 cents to $19.47. Options volume jumped to 14X the average daily. 3,715 calls and 200 puts traded in the name. January 2013 calls at the 20 line were the most actives. Of the 2,320 traded, 99 percent traded at the ask, which indicates increasing buying interest. Jan11, Jan12, and August $20 calls saw interest as well. Some players might be taking bullish positions in Progressive in anticipation of earnings, due January 20th.

Bullish trading was also seen in Aetna (AET), MetLife(MET), and AMR.

Bearish
BancoBradesco(BBD), a Brazilian money center bank, finished the day down 3 cents to $20.21 and options volume included 6,185 puts and only 67 call options Friday. June 20 puts traded more than 4,000X. Another 2,100 January 2013 17.5 puts. In addition, 99 percent of the day's total put volume in BBD traded at the asking price, according to data from web site WhatsTrading.com. It isn't clear what was driving the put buying, but it seems that some investors were taking positions and looking for the stock to dip below $20 per share in the months ahead.

Bearish flow also surfaced in Southern Copper (SCCO), Career Education (CECO), and CVS.

Index Trading
The CBOE Volatility Index (.VIX) is back under pressure. VIX finished the day down .93 to 15.46 and is testing multi-month closing lows set in late-December. The volatility index, which tracks the expected volatility priced into S&P 500 Index (.SPX) options, fell 10 percent on the week. Although considerable macroeconomic uncertainty remains – like the European Debt Crisis and possible slowing economic growth in China – the US stock market continues its steady grind higher, fueled by low interest rate and increasing profit growth. The trend is keeping trading orderly and actual levels of market volatility are falling. VIX is also trading lower, as fear and anxiety about the global macro economy seem to be easing.

ETFAction
DirexionDailyFinancial Bear 3X Fund (FAZ) saw increasing options action Friday. Shares, which are designed to move 300 percent the opposite to the financial sector, finished down 37 cents to $8.26 after strong earnings from JP Morgan helped fuel gains in the financials. Meanwhile, options volume in the FAZ hit 2X the average daily, with 59,000 calls and 13,000 puts traded on the exchange-traded fund. January 9 calls were the most actives. Lots were trading on the bid midday, as some investors were likely selling positions on diminishing hopes for a move beyond $9 in the FAZ through the January expiration, which is now just 4 trading days away (Monday is a holiday).