Trading Tools to Build Your Portfolio: U.S. Bancorp (USB)

              

In last week's edition of Trading Tools, I examined auto-parts issue Magna International Inc. (MGA), as it appeared on the Zacks Unusually High Option Volume filter. Utilizing the same screener again this week, in an effort to find a stock on options players' radars, one equity piqued my interest: financial firm U.S. Bancorp (USB: sentiment, chart, options).

Before we begin, let's explain the contrarian stance that makes Schaeffer's so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.

However, keep in mind that some optimism and pessimism is genuinely warranted and isn't always a contrarian indicator – like an outperforming stock with many "buy" ratings or an underperforming stock with a plethora of "sell" ratings. For more on Schaeffer's Expectational Analysis ®, click here.

The Unusually High Option Volume Screener

The filter is somewhat self-explanatory: we're looking for stocks with single-day option volume in excess of their average volume over the last month. Why is this important? Simply put, this filter allows us to read how options traders feel about a certain stock, and sometimes unusually heavy option activity can be the sign of an event (like earnings or merger-and-acquisition news, for instance) or, occasionally, a reversal of sentiment in the options pits.

Bullish and bearish bettors battle

As alluded to above, USB caught my eye due to its unusually high option activity on Thursday. What really stood out, though, is that options speculators from both sides of the Street targeted the Minneapolis-based banking behemoth.

On the bears' side, the equity saw roughly 24,250 pessimistic puts cross the tape yesterday – more than doubling its average daily volume of fewer than 12,000 contracts. Meanwhile, USB saw almost 24,400 bullish bets change hands – more than twice its average daily call volume of fewer than 11,000 contracts.

After further research, it seems that optimistic options speculators have been more aggressive than their skeptical rivals recently – on the International Securities Exchange (ISE), at least. During the past 10 trading sessions on the ISE, the stock has seen more calls than puts bought to open. Further underscoring the recent affinity for bullish bets, the stock's call/put ratio of 1.17 ranks in the 71st annual percentile, suggesting that options players have added calls at a faster pace only 29% of the time during the past year.

Despite the recent surge in call activity, short-term options speculators remain relatively leery of the financial issue. While the stock's Schaeffer's put/call open interest ratio (SOIR) has descended in recent sessions – indicating escalating optimism – the reading still stands at 0.99, in the 65th annual percentile. In other words, near-term options players have been more skeptical of USB only 35% of the time during the past 52 weeks.

So, the question remains: why yesterday's tidal wave of option activity?

Provoking pressure on the charts

Searching for a potential catalyst behind the recent popularity of USB options, it seems that investors may have been responding to comments from Richard Davis, the regional bank's chief executive. During a presentation to analysts yesterday, Davis warned that USB will post fourth-quarter net charge-offs of $600 million to $650 million and a roughly equal amount of loan-loss provisions. As a result, the financial firm expects to post about $1.2 billion in credit costs for the fourth quarter, a significant increase compared to credit costs of $7.48 million in the previous quarter.

Some investors were taken aback by the company's revelation, as many on the Street considered USB a financial candle in the wind amid the global banking crisis. "It is quite a different view of the company than what one has been led to believe," said Ladenburg Thalmann & Co. analyst Dick Bove.

After finally climbing its way back atop support in the $27-$28 region, the stock took a hit in the wake of yesterday's warning from Davis. From Wednesday's high near $28.60, the shares of USB backpedaled more than 13%, closing at $24.85. In afternoon trading, the security has managed to pare a fraction of those losses, flirting with the $25 level.

From a longer-term perspective, the aforementioned $25 level could have significance, as well. During most of 2000 – 2003, this neighborhood played the part of staunch resistance, capping the equity's rally attempts. Should the shares of USB fail to close the month atop this level, the stock could once again find itself combating overhead pressure from this region.

Word on the Street

Options traders weren't the only group responding to the news. In light of the charge-off predictions, the shares of USB were bombarded by a bout of bearish brokers.

Most notably, Sandler O'Neill slashed its fourth-quarter earnings view on the stock, while Ladenburg Thalmann scaled back its 2008, 2009, and 2010 earnings projections for the bank. In addition, BMO Capital cut its fourth-quarter and 2009 earnings targets, and reduced its price target on the equity to $24 from $26. Meanwhile, RBC Capital followed suit, trimming its 2008 earnings forecast and slashing its price target to $28 from $34.

However, the shares of USB could be in jeopardy of additional analyst ire. Despite only 3 out of 17 ranking brokers rating the stock a "buy" or better, according to Zacks, the equity's average 12-month price target stands at $30.65, Thomson Financial reports. Compared to the revised price targets alluded to earlier, this goal seems somewhat generous. A fresh wave of price-target scale-backs could spark another bout of selling pressure on the shares.

The bottom line

Technically speaking, USB advocates should keep an eye on the $25 level. A monthly close beneath this region could spell trouble for the shares, as this neighborhood could resume its role as staunch resistance.

More importantly, perhaps, investors should note the sentiment surrounding the security. Optimism among options traders is on the rise, and a handful of analysts remain hopeful for USB. Should the company issue more guidance-related surprises, or should the equity fail to successfully combat the $25 area, the lingering bulls could get spooked – potentially fueling the banking issue lower.

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