Dow Closes at Record High – Again

Cusick’s Corner 5.28.13

Strength across most of Asia and Europe’s equity markets helped set the table for a strong open on Wall Street after a three-day Memorial Day weekend. Then, the advance gained steam mid-morning after the Conference Board reported that an index of Consumer Confidence jumped to 76.2 for May, from 68.1 a month ago and much better than the 72.5 that was expected. Bonds slipped on the numbers and the yield on the ten-year Treasury is reaching 13-month highs. Beyond that, it’s been a relatively light news day, however, with no earnings of broad market significance to guide action. Elsewhere, crude oil is up $1 to $95.15 per barrel and gold has seen whippy trading, now down $5.5 to $1381. On Wall Street, the Dow Jones Industrial Average is up 95 points, but 128 points from session highs. With an hour left to trade, the NASDAQ is up 24 points.

Today’s Bullish Trading

Activision Blizzard (ATVI) adds 14 cents to $15.75 and notched new 52-week highs today after rallying 48.3 percent so far in 2013. On the options front, volume in the video game-maker is running 10X the daily average, being driven by a hefty spread trade. An investor bought the Jan 18 – 23 call spread on ATVI today for 75 cents, 8270X, according to a source on the exchange floor. That is, they bought 8,700 Jan 18 calls on the stock for 85 cents and sold 8,270 Jan 23 calls at a dime per contract. The spread is opening (volume exceeds open interest in both contracts) and has traded more than 10000X today. If so, the positioning seems to be expressing confidence that Activision Blizzard shares will see continued strength and could be trading at substantially higher prices through mid-Jan 2014.

Bullish trading was also seen in Ford (F), Covanta (CVA), and LSI Logic (LSI).

Today’s Bearish Trading

Oracle (ORCL) adds 55 cents to $34.60 and options volume on the software-maker heading into the close Tuesday includes 28,000 puts and 21,000 calls. The top trade is a 5,900-contract block of June 31 puts, bought for $2.60 per contract, according to a source on the exchange floor. 11,650 contracts now traded. Jun 31 puts on ORCL are 10.4 percent out-of-the-money and expiring in 24 days. The company is expected to report earnings around June 17th and ORCL fell nearly 10 percent on March 21 when the company last released results. Some investors are possibly buying the downside puts today as protective positions against shares heading into the next earnings release.

Bearish trading also seen in Exelon (EXC), Century Aluminum (CENX), and FTI Consulting (FCN).

Index Recap

CBOE Volatility Index (.VIX) is edging higher, even as the S&P 500 Index (.SPX) is up 10.87points to 1660.46. VIX, which tracks the expected or implied volatility priced into S&P 500 options, often moves lower when the S&P 500 scores a solid daily gain. The index is straying from that normal pattern Tuesday, however, and is up 15.2 percent over the past six trading days. VIX has been ticking higher after reaching relatively low levels of 12.45 on May 17. Sentiment in the options market seems mixed and to reflect uncertainty about the next direction for the index. August 13 puts are the most active in the VIX pit today. 60,000 traded. June and July 30 calls are the next most actives, with more than 30K traded in both.

Analyzing the ETF Market

SPDR Healthcare Fund (XLV) is up 47 cents to $49.59 and is poised to set a new record closing high. In the options market, a spread trades on XLV after an investor apparently sold 10,000 June 50 calls on the ETF at 56 cents per contract and bought 12,000 Jul 52 calls for 21 cents each. Looking at trade history and open interest in both contracts, the activity appears to roll a position out from Jun 50s to the July 52s. XLV was the top performer among the nine SPDR Sector Funds in the first quarter and is up 24.3 percent year-to-date. An investor might have held a position in the Jun 50s during the recent rally and, now with the June expiration in less than four weeks, they are rolling to July calls at a higher strike. If so, the position adjustment seems to be expressing the view that the rally in the healthcare sector can continue over the next two months.