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Shares rise on profits but caution signs appear

Shares rise on profits but caution signs appear
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First Published: Wed, Jul 14 2010. 12 40 AM IST
Updated: Wed, Jul 14 2010. 12 40 AM IST
New York: US stocks rallied on earnings optimism on Tuesday, but options activity and technical indicators suggested growing investor uneasiness about whether the market can sustain its six-day advance.
Alcoa Inc, the largest US aluminum producer and seen as a bellwether for the US economy, rose 1.1% to $10.99 after reporting stronger-than-expected results.
The rosy results gave a boost to other Dow component stocks such as Intel and JPMorgan Chase, which are due to report earnings this week. All 30 blue-chip companies were trading higher by midday.
But some analysts warned that bullish momentum may be waning as trading volume continues to decline while the cost of protection against a market drop keeps growing.
The S&P 500 Index is up about 8% from a recent intraday low on 1 July, but daily trading volume fell to a six-month low on Monday.
“It’s raising new cautionary flags,” said Scott Fullman, director of derivative investment strategy at WJB Capital Group.
The Dow Jones industrial average was up 155.90 points, or 1.53%, at 10,372.17. The Standard & Poor’s 500 Index was up 16.45 points, or 1.52%, at 1,095.20. The Nasdaq Composite Index was up 34.73 points, or 1.58%, at 2,233.09.
Fullman said total volume in the options pit also eased by 6.1% on Monday, led by a 10.7% drop in call trading. The drop increased the total put/call ratio to 0.84 from 0.75, indicating more investors are betting on stocks’ fall.
But Paul Hickey, co-founder of Bespoke Investment Group said the decline in volume may not be a factor.
“Volume’s been lower since the market lows last March. That’s more a function of the holiday week and the summer ... I wouldn’t read too much into it,” Hickey said.
Cost of protection
In the options market, a heavy put buying was detected in an exchange-traded fund that tracks the S&P, indicating that a trader is combining the leverage of options and ETF to obtain a short-term insurance policy.
One investor snatched up July $35 puts on the ProShares Ultra S&P 500, an exchange traded fund that delivers double the performance of the S&P 500. The heavy purchase drove premiums to jump from 32 cents to as high as 46 cents, said David Russell, options strategist at optionMonster.com.
Volume surged to 19,624 contracts, more than nine times open interest in the strike.
The ETF rose 2.9% to $36.35 by midday, up about 13% from a week ago.
“Buying puts on the fund will protect the investor if the ETF falls below about $35.60 by the end of the week, which would correspond to about a 2% decline in the S&P 500,” said Russell.
The trade pushed total options volume in the ETF to 73% greater than average and puts outnumber calls by 4 to 1, he said.
Investors will continue to closely eye earnings this week for more clues on the state of the economy.
Intel, the world’s largest chipmaker, is due to report earnings after the bell. Its stock rose 1.9% to $20.97. JPMorgan Chase was up 2.8% to $40.29.
The euro zone crisis also returned to the fore as ratings agency Moody’s Investor Service cut its rating on Portugal by two notches to A1. The US trade deficit unexpectedly widened in May.
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First Published: Wed, Jul 14 2010. 12 40 AM IST
More Topics: Markets | US | Stocks | Wall Street | Alcoa Inc |