Some Positioning Ahead Data 06-22-2010

Cusick’s Corner
The trade turned south into the After Hours, in part due to disappointing housing data (as mentioned in the Midday) and ahead of the release of New Homes Sales in tomorrow’s premarket, plus the upcoming FOMC decision. With these erratic moves over the last two days shaking out the shorts and moving some anxious long side money into the market from the sidelines, it looks like we could be in for a whippy ride going into the remainder of this week. Bonds were on a nice run on the upside today, pushing yields even lower. Consumer discretionary spending looks to have been pulling back, which could be signaling lower than expected GDP growth, so put XLY and XRT on your radar screen. Watch support overnight and early morning, 1088 on the SPX -- check if the EU’s economic data and New Home Sales (expectations of 430K-450K) move the market in the morning. See you Midday.

Stocks finished broadly lower, as volatility picked up during the second half of the trading session Tuesday. Market action was quiet through midday despite data released mid-morning that showed Existing Home Sales falling to an annual rate of 5.66 million in May, down from 5.79 million the month before. The decline was a shock. Economists were expecting to see an increase to 6.10 million. While the Dow Jones Industrial Average dipped on the data, the decline was orderly and stocks were again trading mixed by mid-session. However, volatility picked up in the final 90 minutes, with notable weakness in some of the cyclical names within the industrial average. Home Depot (HD), Caterpillar (CAT), and Alcoa (AA) were among the Dow’s biggest losers. There didn’t appear to be one specific catalyst for the late-day slide, but some players were likely closing positions ahead of New Home Sales data and the FOMC rate announcement Wednesday. The Dow Jones Industrial Average closed down 149 points and the tech-heavy NASDAQ lost 27.3.

Bullish Flow
Tanzanian Royalty Exploration (TRE), a South Surrey, British Columbia gold mining company, bucked the bearish trend. Shares rose 20 cents to $5.03 and approached a 52-week high of $5.07 set in mid-May. Options action picked up as well, with 5,170 calls and 50 puts traded, or 23X the normal volume for the name. The action was focused on the January 10 calls, which traded 4,300X. Buyers were paying 15 cents to open new positions on the ISE, according to ISEE sentiment data. These ambitious traders are paying small premium, of only 15 cents, because the calls are so far out-of-the-money. Shares would need to double for the contract to move in-the-money.

Bullish order flow was also seen in OfficeMax (OMX), Diamond Offshore (DO), and Dynegy (DYN).

Bearish Flow
PPL options saw a day of brisk trading. Shares of the Allentown, PA electric utility finished down $1.42 to $24.24 and options volume hit 38X the average daily, with about 20,000 puts and 2,000 calls traded in the name. July 25 puts were the most actives. 10,560 contracts traded and, with 70 percent traded at the asking price, it looks like premium buyers were dominating the action and bracing for additional volatility in PPL shares. The action follows news that the company plans two offerings, one for 90 million shares of common stock and another of $1 billion of equity unit securities.

Bearish flow also picked up in Carnival Cruise (CCL), Adobe (ADBE), and Skyworks Solutions (SKYW).

Index Trading
The CBOE Volatility Index (.VIX) sprung back to life Tuesday. The market’s “fear gauge” had fallen from 36.6 to 24.0 in the two weeks ended last Friday. However, VIX edged up to 24.9 Monday and then rallied to 27.05 Tuesday. The gains in the volatility index Tuesday coincided with a 17.9-point loss in the S&P 500 Index (SPX). Hedging activity picked up noticeably later in the day, with 455,000 puts and 200,000 SPX puts traded on the session. However, overall volume in the index market remains light, with 605,000 puts and 398,000 calls traded across all the cash indexes.

ETF Trading
While some players turned to SPX puts for portfolio protection Tuesday, others focused on the S&P Depositary Receipts (SPY). What’s the difference? SPX is a cash index and settlement of its options involves the transfer of cash. SPY is an exchange-traded fund that holds the same stocks as the S&P 500 and also has shares listed in the US equities market. Investors can buy and sell SPY throughout the trading day like stock. Consequently, options settle for physical delivery of shares. SPY is equal to about 1/10th of the SPX and finished the day down $1.84 to $109.57. 1.1 million puts and 567,000 calls traded on the ETF.