Financials Lagging

Cusick’s Corner 07-18-2012 1:03pm
The market continues to chug along and on the earnings front there have been some decent financial stocks beating estimates. Financials are one of those leading sectors that need to continue to lead but today this sector is lagging, XLF -14%, which is probably not what a bull wants to see. The VXX, a volatility index, is up +1.3% which is not a totally bullish flag. These are flags that stop me from chasing until I get confirmation that a move to the upside might look like it has sustainability. See you After Hours.

Stock market averages are holding gains with help from housing data Wednesday. A report released before the opening bell on Wall Street showed Housing Starts improving to an annual rate of 760,000 in June, from 711,000 in May and significantly better than the 743,000 that was expected. However, Building Permits, which offer a better gauge of future activity, declined to 755,000, from 784,000 and 10,000 worse than expected. Nevertheless, the Dow Jones Industrial Average opened steady heading into testimony from Fed Chairman Ben Bernanke. In remarks to Congress, the head of the Federal Reserve rehashed many of the same thoughts from the day before and said he expects gradual economic improvement going forward. Gains across Europe, including a 1.7 percent advance in France’s CAC 40 Index and a 1.5 percent gain for Germany’s DAX, probably helped investor sentiment today as well. The earnings news was mixed, but Intel (INTC), Honeywell (HON), and St. Jude Medical (STJ) are up on the heels of their respective results. Crude oil ticked 27 cents higher to $89.81 on the heels of weekly inventory results, but gold lost some of its flight to safety bid and is down $15 to $1574.5 an ounce. Meanwhile, the Dow Jones Industrial Average is up 103 points and near session highs. The NASDAQ gained 37.6 points. CBOE Volatility Index (.VIX) lost .35 to 16.13. Trading in the options market is active today heading into the expiration later this week, with almost 4 million calls and 3.3 million puts traded across all the exchanges through 11:45am ET.

Bullish Flow
The largest equity options blocks traded so far today are in Freeport McMoran (FCX). Shares of the copper and gold mining company are up 51 cents to $33.41 and, in morning trading, an investor bought 19,275 August 36 calls on the stock for 46 cents and sold 19,000 August 40 calls at a dime. The Aug 36 – 40 call spread, for 36 cents, and a source on the floor confirms the spread was bought. It appears to be a new position because volume exceeds open interest in both contracts. If so, it seems to be a rather bold play because Freeport McMoran reports earnings tomorrow morning. The Aug $36 calls on the stock are 7.8 percent out-of-the-money and expiring in 30 days.

Newell Rubbermaid (NWL) is up 63 cents to $18.38 in active trading of 1.8 million shares and options action is picking up in the name as well. 5,200 calls and 3,760 puts traded on the consumer products company so far. August 18 calls, which are now 38 cents in-the-money after today’s pop in the stock, are the most actives. 2,530 changed hands. August 17 and July 18 calls are also seeing interest. Aug 17s and 18s are the most active puts. No news on the ticker today. Some investors might be taking positions in NWL in anticipation of its July 27 earnings release. Shares have moved higher the day after each of the past four quarterly reports, for an average daily post-earnings gain of 7.6 percent.

Bearish Flow
CBOE Volatility Index (.VIX) is off .34 to 16.14 and the unofficial settlement for VIX July options, which expired today, is 16.76. That’s the second lowest of the year behind the 14.55 seen in March and is also down from the 17.78 settlement in June. One player in the options market seems to be anticipating a possible rebound in the index through the next expiration, however, as a hefty call spread was apparently bought on the volatility index Wednesday morning. In this trade, the investor seems to have bought 14,515 August 23 calls on VIX for $1 even and sold 14,515 August 28 calls at 55 cents. The spread, for a 45-cent debit, might be designed to hedge the risk of another round of market volatility and a spike in the VIX before the August expiration, which is five weeks from today for VIX options.

New Oriental Education and Technology Group (EDU) is down for a second day. Shares lost more than 30 percent yesterday after the company released earnings and disclosed that it is the subject of an SEC investigation. The stock is down another $2.62 to $12 on heavy volume of 26.5 million shares. By way of comparison, typical volume on the stock through midday is about 1.5 million. Meanwhile, 50,000 puts and 20,000 calls traded in EDU today. Implied volatility in the options on the Chinese education company jumped 61 percent to 158.

Unusual Volume
Qualcomm (QCOM) options volume is running 2.5X the (22-day) average, with 94,000 contracts traded and call volume accounting for 94 percent of the volume.

Nokia (NOK) options volume is 3X the average daily, with 109,000 contracts traded and put volume representing for 79 percent of the activity.

Vivus Pharmaceuticals (VVUS) options volume is running 4X the average daily, with 120,000 contracts traded and put volume accounting for 51 percent of the activity.

Increasing options activity is also being seen in EMC, IMAX, and Lowe’s (LOW).

Implied Volatility Mover
Implied volatility in the options on Vivus Pharmaceuticals (VVUS) is down sharply today after the stock rallied on news the company won FDA approval for its weight loss drug. The stock is up $4.06 to $30.52 in active trading of 27 million shares. Meanwhile, 67,000 calls and 71,000 puts traded on the biotech. Some investors might be unwinding positions initiated ahead of the news. July 30 calls, which are now 52 cents in-the-money and expiring in just a few days, are the most actives. 9,550 traded. Meanwhile, 30-day at-the-money implied volatility is falling 54 percent to 60 now that this important company event risk has passed.


Joe Cusick

Read more: