Don't Fight the Trend 06-07-2010

Cusick’s Corner
The 1050 mark on the S&P 500 has come under attack – there’s a lack of leadership from Financials (XLF)/Tech (QQQQ), and a defensive tone with a flight to the Gold (GLD) and Utilities (UTH). Keep the powder dry in this environment, these are trading markets and there is no sense fighting this trend. If we see the 1036 level broached, then we could see a potential re-test of the Feb lows. See you Midday.

Major averages suffered another round of losses on a relatively slow news Monday. After Friday’s 323-point slide, the Dow Jones Industrial Average opened a bit higher following a day of steady trading in Europe. Market action was mixed into midday. Then, another round of selling pressure surfaced late in the session. While there wasn’t one specific news event to explain the late day slide, the market remains fixed on the euro, which also faltered and is now trading near 1.1940 against the buck, down from 1.1975 before the stock exchanges opened in New York. At the end of the day, BofA (BAC), Caterpillar (CAT), and Intel (INTC) were among the biggest losers in the Dow and the industrial average finished down 116 points while the NASDAQ lost 45.

Bullish Flow
Tyson Foods (TSN) finished the session up 2 cents to $17.52 and TSN calls saw a noticeable uptick in activity Monday. 6,230 contracts traded, which is 6X the typical volume and compares to just 45 put options. The action was concentrated in January 2011 calls at the $20 strike. 5,796 changed hands on the day. One investor bought 1,200 contracts at $1.375 and another bought 2,800 at $1.375. Open interest in the contract is already 28,800 and by far the largest position in TSN. So, today’s action might be closing trades. If not, it’s noteworthy, as it appears some investors are accumulation positions and looking for a move back above $20 through the rest of 2010.

TIVO, Green Mountain Coffee Roasters (GMCR), and OfficeMax (OMX) also had bullish order flow.

Bearish Flow
Alcoa (AA) lost 33 cents to $10.51 and was among the biggest losers in the Dow Jones Industrial Average Monday. Shares have now tumbled 30 percent over the past two months. One options strategist seems to think the volatility will continue. They apparently bought a block of 13,850 October 10 puts at 90 cents each. This position was tied to 500,000 shares of stock and not a straight bearish bet; but rather a play on heightened volatility in Alcoa shares during the months ahead. A total of 26,000 puts and 19,000 calls traded on the aluminum maker Monday.

Bearish flow also picked up in TEVA, Walmart (WMT), and Evergreen Solar (ESLR).

Index Trading
The CBOE Volatility Index (.VIX) finished the day up 1.09 to 36.57 and some noteworthy trades surfaced in the VIX puts late in the day Monday. One player bought an impressive 25,000 July 40 calls at $2.85 per contract. This massive premium purchase was tied to a position in VIX futures on a delta of 38, according to a source on the exchange floor. If so, it appears to be a bet that the volatility in the VIX will continue in the weeks ahead. 169,000 calls and 75,000 puts traded on the volatility index total.

ETF Trading
While the major averages remain under pressure, the top options trades Monday seem to reflect a bullish market outlook for the months ahead. The S&P Depositary Receipts (SPY) is an exchange-traded fund that holds the same stocks as the S&P 500 and, after trading higher early, finished down $1.33 to $105.49. The biggest options trade include an August 115 – June 110 call spread apparently bought at $1.65, 42000X. That is, it appears an options player sold-to-close a position in 42,000 June 110 calls at $1.07 and bought-to-open a similar position in the August 115 calls at $1.72. They might be looking for shares of the fund to hold below $110 through the June expiration (11 days) and move beyond $115 through the August expiration. It might also be a move to hedge a short portfolio.