Mounting Global Economic Fears 05-20-2010

Cusick's Corner
Major US markets fell like a rock today after continuing fear that the EU debt crisis may thwart any US recovery. The Euro jumped against the Dollar after there were rumors that the European Central Bank might intervene to support the Euro which then set off short-covering in the Euro. The VIX also soared to levels not seen since March 2009 and stock volume was huge with 2 billion shares trading on the NYSE (lately it’s been averaging 1.3 billion shares). To describe today’s US market plummet, analysts are using the word “market correction.” What does that term mean? A market correction is usually a negative movement of at least 5%-10% in a stock, bond, commodity or index. A correction occurs when there are short-term changes in price direction (which can last several months) within a larger primary trend. Review your positions, overall risk and exit strategies. Check your expiring stock and ETF option positions and call optionsXpress early if you have any questions about your account. Don’t wait for the last few minutes on the last trading day to call. See you Friday.

The major averages suffered steep losses amid mounting fears about the global economic outlook Thursday. European and Asian markets fell overnight and stock index futures came under additional selling pressure Thursday morning after the Labor Department reported an unexpected jump in weekly jobless claims. The following issues added to the worries: falling crude oil prices (down 2.8 percent), uncertainty regarding Financial Reform in Washington, and a general sense of unease about the global banking system due to the ongoing debt problems in the eurozone. The Dow Jones Industrial Average tumbled 376 points and the NASDAQ lost 94. The CBOE Volatility Index (.VIX) saw a 10.5-point spike to 45.79. Options volume surged, with unofficial numbers showing 16.6 mln puts and 12.3 mln calls traded Thursday.

Bullish Flow
Union Pacific (UNP) shares lost $3.64 to $67.94 and an interesting spread trade surfaced early when an investor apparently bought 2,000 August 70 calls at $5.25 while selling 2,000 August 75 calls at $3.00 each. This spread, for a $2.25 net debit, looks like a bullish bet in anticipation of a rebound in the stock in the months ahead. It reaps its best profits, of $2.75 (excluding commissions), if shares finish above $75 at the August expiration. The bullish spread comes the day after JP Morgan analysts raised second quarter earnings estimates on the railroads and said they prefer Overweight-rated UNP and CSX Corp (CSX).

Bullish order flow was also seen in Exco Resources (EXCO), Caterpillar (CAT), and DISH Network (DISH).

Bearish Flow
Sony (SNE) saw a second day of bearish trading. As noted yesterday, 6,100 puts and 600 calls traded on the Japanese electronics maker Wednesday. Most of the action was on the June 30 puts, including a large buyer at $1.05 per contract. Shares fell $1.06 to $30.67 and the action continued Thursday morning. Another 4,330 June 30 puts traded, including a morning buyer of 3,600 at $1.30. Meanwhile, January 30 puts traded 4,300X and July 30 puts, another 1245X. 13,000 puts and 340 calls traded total. There have been no recent negative headlines on Sony to explain the put volume, but the options action seems to reflect concerns about shares falling below $30 in the weeks ahead.

Bearish flow also picked up in Arch Coal (ACI), Autonation (AN), and Rockwell Automation (AN).

Index Trading
Trading in S&P 500 Index (SPX) options was very busy for a second day. The index, which tracks the price action of shares in five hundred of the largest listed stocks, slipped below its 200-day moving average around 1,100 early and then finished the trading session down 43.5 points to 1,071.59. In the options, nervous investors scrambled to buy index puts to hedge portfolios. 1.46 million puts and 722,000 calls traded on the S&P 500 Index. High volatility and increasing interest in SPX options was enough to send the CBOE Volatility Index (VIX), which tracks expected volatility priced into SPX options, up an impressive 10.47 to 45.79. It was the third 30 percent gain in the VIX so far this year.

ETF Trading
Trading surged in the S&P Depositary Receipts (SPY) as well. Like the S&P 500 Index, SPY is a proxy for the price action of 500 of the largest stocks trading on the US exchanges. Both products hold the same names with the same (market-value) weighting. What’s the difference between the two? SPX is a cash index and SPY is an exchange-traded fund. Therefore, SPY shares can be bought and sold and SPY options settle for shares. SPX options settle for cash. In addition, the price of one SPY share is designed to equal about 1/10th of the S&P 500 Index. It fell $4.22 to $107.54. The options on both products are actively traded. In the SPY, 3.6 million puts and 1.8 million calls traded Thursday.