After increasing volatility stirred up some investor anxiety in the week ended May 22, most indicators suggest that bullishness is back on the rise. As has been duly noted in recent months, the shift in sentiment is positive, as it comes after a stock market crash in 2008 and, only once confidence is restored, can the market make a sustainable move higher. That trend appears to be intact and now some sentiment indicators are reaching levels not seen in more than a year.

Investors Intelligence reports that bullish sentiment increased a bit and bearishness fell last week. The survey now reads 40.9 percent bullish and 28.4 percent bearish, which compared to 40.7 bullish and 29.1 percent bearish the week before. According to the Investors Intelligence poll, bearishness is at its lowest levels since May 16, 2008!

Other indicators also point to rising levels of bullishness. For example, the ISE Sentiment Index, which tracks daily call volume divided by daily put volume (X100) on the International Securities Exchange [ISE] saw a spike Friday. ISEE finished the day at a two-month high of 175, suggesting that put buying was running 57 percent of call purchases on the ISE, the largest exchange for equity puts and calls.


ISEE Sentiment Index (source: iseoptions.com)–Click for larger view.


From a contrarian view of the markets, high levels of bullishness often urge caution. If everyone is piling on one side of the ship: Get on the other!

However, in the post-crash world, it might be dangerous to assume the market is overbought. In fact, the increasing levels of optimism are feeding money into the equity market. AMG data reports that $4.6 billion flowed into stock funds in April. $2.9 billion moved into equity funds the past two weeks. While the flows aren’t massive, they stand in stark contrast to the fourth quarter of 2008 and the first quarter 2009 when funds were being hit with massive redemptions!

In conclusion, the equity market has shown impressive resilience over the past few months and the trend can feed on itself, as increasing levels of optimism motivates more money to move into the equity market. In this environment, it still makes a lot of sense to look for opportunities to trade the market in both directions by tracking the options order flow and identify those stocks/industry groups/sectors that are at risk of another wave of selling for bearish opportunities. Focus bullish trades on those groups showing upside momentum and bullish order flow.

Stocks hold steady throughout most of the session, rally late. VIX down 2.75 to 28.92. Read More.

iShares Emerging Market Fund (EEM) has seen two days of bearish spread trading. Thursday, large spread traders focused on the September 23 - 28 put spread along with short Sep 36 calls. Today, the activity was similar but in different strikes, with a strategist buying 15000 Sep 23 - 29 put spreads while selling 15000 Sep 37 calls. The activity late in the day seems a bit more bullish, however, as two blocks of almost 40K July 39 calls traded for 13 and 14 cents on the ISE, which are opening customer call buys, according to sentiment data. EEM is up 26 cents to $33.

CardioNet (BEAT) suffered a beat-down Friday. Shares are down $1.23 to $17.60 and hit a low of $16.55 earlier in the day on no apparent news. In the options market, put volume picked up for a second time this week. 6571 contracts traded, compared to 900 calls. June 17.5 puts are the most actives, with 5,565 traded. Some players might be exiting positions opened Wednesday, when shares were around $18.20 and more than 5,100 contracts traded on the day (90 percent ask-side)–discussed here in WhatsTrading.com Premium. At the same time, it appears that some put buyers are taking positions in June and Nov 15s, sending implied volatility up another 2 points to 72, up from 56 Tuesday. Still Bearish.

iShares Silver Fund (SLV) is up 50 cents to $15.43 after silver (July) gained an impressive 45 cents to $15.61. In the options market, one strategist appears to be looking for additional upside in silver and bought the Jan 2010 14 - 19 (3X4) ratio spread 75000X and also sold 100,000 SLV January 2010 13 puts. All traded electronically on the ISE and the total package seems to reflect the view that the exchange-traded fund will continue to shine during the second half of 2009 (but not significantly higher than $19 per share.)

Dryships (DRYS) is up 65 cents to $7.95 and calls are seeing increasing volume Friday. No news on the stock today. The company announced that it reached an agreement with Deutsche Bank as a lender yesterday. For whatever reason, shares are up and 57K calls traded, compared to 9,700 puts. June 7.5, June 9, July 8 and July 9 calls are seeing the bulk of the volume. Implied volatility moving to 108, from about 106 the day before.

Marathon Oil (MRO) is up 69 cents to $31.70 and options volume is running 3X the normal levels. 18K calls and 2,100 puts traded. Some of the activity is due to one trade, where an investor sold 4,900 July 32 calls for $1.575 and also bought 7,200 July 34 calls for $1.05. The trade possibly closes out a position in 32 calls while opening a similar long position in the 34s. No news on the stock today. Crude oil is up $1.06 to $66.14. MRO implied volatility is down o 41, from about 42.5 late yesterday.

Crude recaptures $66 a barrel. Read More.

The major averages have moved in and out of positive territory Friday morning and are sporting modest losses midday.

GM is weighing down the Dow Jones Industrial Average. Shares of the automaker are down 20.5 percent to 89 cents per share ahead of the looming bankruptcy deadline Monday.

The day’s economic news didn’t help much either. A report released pre-market showed GDP falling 5.7 percent in the first quarter (below estimates of -5.5 percent). The latest Chicago Purchasing Manager’s Index fell to 34.9 in May, from 40.1 (42 consensus). The U of Michigan was the bright spot, up to 68.7 in late May, up from 67.9 (68 consensus).

In the end, the day’s news really didn’t offer investors too many reasons to bid stocks higher heading into the weekend. The Dow is down 25 points and the NASDAQ has given up 7.

Trading has been in a narrow range so far. Consequently, the CBOE Volatility Index (.VIX) is down .51 to 31.16. Approximately 2.2 million puts and 3.1 million calls changed hands during the first two hours, a ratio of 71.

iShares Long-term Bond Fund (TLT) June 96 calls are active, as bonds rally on today’s weak economic numbers. The benchmark ten-year Treasury note is up 14/32nd and yields 3.56 percent. TLT gained $1.25 to $93.05 and 10.2K June 96 calls traded so far.

Some of the gold names are seeing interest as the precious metal rallies more than $16 and moves towards $980. Call volume picked up in Gold Fields (GFI), Barrick Gold (ABX), and the SPDR Gold Trust (GLD).

GM June 1 put is the most actively traded contract for a second day. Buyers are paying 61 cents at current prices and stand to make 39 cents if the automaker falls into bankruptcy and the stock falls to zero.

iShares Emerging Markets Fund (EEM) is seeing a second day of active trading. The activity is similar to trades seen yesterday, but at different strike prices. Today, one trader bought 15000 September 29 - 23 put spreads, while selling 15,000 September 37 calls. The short calls financed the put spread and this trader came out even.

Bearish trading also picked up in Pool Corp (POOL), Arris (ARRS), and Cardionet (BEAT). Meanwhile, bullish trading surfaced in Savient (SVNT), ViroPharma (VPHM), and NVidia (NVDA).

Options activity is picking up in the SPDR Gold Trust (GLD). Shares of the exchange-traded fund, which holds gold stored in bank vaults, are up $1.88 to $96.12 after gold gained $16.30 to $979.50 an ounce. 156K GLD calls and 36K puts traded so far. The top trades of the day appear to reflect a bullish view going forward as well, as one player apparently bought the GLD Dec 120 - 140 call spread, while selling Jul 84 puts. Did it 16500X and paid $1.45 on ISE. Looks opening.