ADP Poor – Cusick’s Corner

Cusick’s Corner 05-02-2012 1:46pm CDT
The data picture out of the EU overnight pushed the futures down, S&Ps below 1400, and the poor ADP out premarket put short-term pressure on the market. When numbers hit like this morning’s, the first places that I look for a reaction is in Commodities, DBC, JJC, JJG and Transports, IYT (as I have been noting all week). The reason I look to these two is that they are very economically sensitive sectors. No surprise that Commodities have slipped, down between .5%-1.5% but holding into the Midday. What is surprising is the pop in the Transports, up .65%, offers a glimmer of light after poor data. The action in the Euro Currency, down .56%, is negative and if we see a deeper dive then this could pressure the longs into the After Hours.

Stock market averages slipped on jobs data Wednesday morning. Before the opening bell on Wall Street, ADP reported that the US economy added 119,000 private sector jobs last month. Economists were expecting an increase of 170,000 and the disappointing reading comes two days before the Labor Department releases its April payroll report. Economists expect Friday’s numbers, which include both private and public sector jobs, to show an increase of 160,000. Those expectations might have been scaled back a bit today, however, after ADP’s headline number was well below expectations. Meanwhile, crude oil slipped $1.02 to $105.14 on bearish inventory data and gold lost $12 to $1650.5. The Dow Jones Industrial Average opened lower, but quickly stabilized and is down just 40 points midday. The NASDAQ lost 2 points. CBOE Volatility Index (.VIX) ticked up .64 to 17.24. Overall options volume is light and seems to reflect the cautious underlying tone, with approximately 3 million calls and 3 million puts traded across all the exchanges through 11:45am ET.

Bullish Flow
The homebuilders are seeing noticeable strength today despite the poor economic data. SPDR Homebuilders Trust (XHB), which is an exchange-traded fund that holds a basket of leading names from the industry, is up 49 cents to $22.27 and touching new 52-week highs today.

Cobalt Energy (CIE), a Houston, TX oil and gas company, is down $1.26 to $24.40 and has suffered a two-day 8.8 percent slide since earnings were reported yesterday morning. Some investors might be taking a contrary view of the situation today and buying calls on CIE Wednesday. Total volume is running 2X the daily average, after 8,350 calls and 1,980 puts traded on the stock. June 27.5 and July 30 upside calls are the most actives.

Bearish Flow

A hefty spread trades in the SPDR 500 Trust (SPY) Wednesday morning. The so-called "SPYders" are down 74 cents to $140 and one strategist sold 32,000 May 134 puts on the ETF for 37 cents per contract, bought 16,000 May 137 puts for 80 cents and bought 16,000 May 130 puts for 15 cents. In other words, a May 130 – 134 – 137 put butterfly spread was bought on the ETF for 21 cents, 16000X. The action might roll or close an existing position, as open interest is sufficient to cover in all three contracts. On the other hand, if opening, the spread represents a bearish play on the SPY with a max profit if shares fall to $134 through the expiration, which represents a 4.3 percent market slide over the next 17 days. The debit is at risk if shares hold above the higher strike ($137) and the position is left open through the expiration.

Sysco (SYY), a Houston, TX food wholesaler, is off 20 cents to $28.81 and put volume is picking up in the stock ahead of a May 7 earnings release. 6,480 puts and only 30 calls traded in the name so far. By way of comparison, average daily volume in SYY is less than 3,000 contracts. May 38 puts are the most actives. 4,145 traded. The contract is 6.3 percent out-of-the-money and expiring in 17 days. Some investors might be buying downside puts on the stock to hedge the earnings event risk. Shares slid 3.6 percent on 2/6 when earnings were last released.

Unusual Volume
Chesapeake (CHK) options volume is running 2.5X the (22-day) average, with 257,000 contracts traded and put volume accounting for 59 percent of the volume.

Weatherford (WFT) options volume is 2X the average daily, with 45,000 contracts traded and call volume representing for 95 percent of the activity.

Herbalife (HLF) options volume is running 2.5X the average daily, with 25,000 contracts traded and call volume accounting for 67 percent of the activity.

Increasing options activity is also being seen in Aetna (AET), Lennar (LEN), and Genworth (GNW).

Joe Cusick