Is this the Best the Bulls Got?

Stock market averages edged higher through midday, but gave up most of the gains in afternoon trading Thursday. Economic data was in focus early after a report showed Gross Domestic Product improving at a 2.5 percent annual rate in the second quarter. Economists were expecting to see more tepid growth of 2.1 percent. Separately, Jobless Claims declined by 6,000 to 331,000 last week, which was mostly in-line with expectations. Treasury bonds were little moved by the data and the yield on the ten-year Treasury eased back to 2.75 percent. In stock news, Verizon (VZ) was up 2.7 percent and the best gainer in the Dow on reports the company is in negotiations with Vodafone (VOD) over a Verizon Wireless joint venture. Elsewhere, equity markets were mostly higher across Asia and Europe, but crude oil gave back $2.13 to $107.97 and gold lost $12 to $1407. On Wall Street, the Dow was up 80 points midday, but closed with a modest 16-point gain. The NASDAQ added 27.

Today’s Bullish Trading

Delta Airlines (DAL) is up 52 cents, or 2.7 percent, to $19.65 amid strength in the airline sector late-Thursday after the Department of Justice said it might settle its suit related to the US Airways – AMR merger. Shares of the major airlines companies saw turbulent action a few weeks ago when the DOJ said it wanted to block the merger for anti-trust reasons. Shares of LCC, UAL, DAL, and others are broadly higher today, however, and options volume on Delta is lopsided, as 21,000 calls and 3,800 puts traded on the stock so far. The biggest trade is a spread, in which the investor was selling 4,800 Sep 19 calls on DAL at $1.10 and buying 4,800 Dec 21 calls for $1.28. Looking at trade history and open interest of these two options contracts, the activity (diagonal spread) appears to be rolling a position in Sep 19 calls, as the contract is now in-the-money and expiring in three weeks. The same investor is also opening a new position in Dec 21 calls and, if so, seems to be expressing confidence that Delta shares can gain additional altitude in the months ahead.

Bullish trading was also seen in Carnival Cruise (CCL), Myriad Genetics (MYGN), and Broadcom (BRCM).

Today’s Bearish Trading

Two European financial services companies — Credit Suisse (CS) and Deutsche Bank (DB) — saw increased put activity Thursday. DB, the German Bank, lost 41 cents to $43.02 and an investor apparently bought a 5,000-contract block of January 37.5 puts on the stock this morning for $1.40 per contract. 5,750 traded total against 3,843 in open interest. So, the activity appears to be a new put purchase. Meanwhile, Switzerland’s Credit Suisse was down 18 cents to $29.19 and afternoon trades on the stock included 5,000 March 28 puts for an average of $1.925 per contract. Open interest at that strike is only 82 contracts and so the apparent put purchase in CS appears to be a new position as well. Taken together, the flow seems to be expressing concerns about the short-term outlook for the two banks and maybe reflecting a bearish view about Europe as a whole.

Bearish trading was also seen in Morgan Stanley (MS), T-Mobile (TMUS), and Finisar (FNSR).

Index Recap

CBOE Volatility Index (.VIX) seized the 17 level, almost. The market’s so-called ‘fear gauge’ hit an afternoon high of 16.98 and finished the day up .33 to 16.82 – its highest close since late-June. VIX moved higher even as the S&P 500 rose 3.21 points to 1,638.17. The volatility index tracks the expected or implied volatility priced into SPX options and often moves lower when the S&P 500 gains ground. Today, however, both indexes ticked higher and the uptick in VIX might reflect expectations of some market participants that volatility will increase after the Labor Day weekend.

Analyzing the ETF Market

iShares Emerging Markets Fund (EEM) added 29 cents to $37.73 on a day of relatively quiet trading across global financial markets. In options action, December 38 puts on EEM were the most active options contract across the exchanges Thursday. More than 123,300 contracts traded, including a morning buyer of 14,000 per contracts for $2.29 per contract. Open interest at that strike is 44,515. Therefore, today’s activity appears to be new positioning and, if so, expressing a cautious or bearish view about the outlook for global emerging markets for the next few months.