Defensive Trade 06-29-2010

Cusick’s Corner
Defense! Defense! Risk adverse trade is on in full force this morning after the market received a jolt first from the gloomy China growth downgrade and then the much lower consumer confidence, potentially signaling a double dip recession. Bonds are on a tear and yields as I write this, have dipped below 3%. As yields go -- so goes the market. Also, all major indices are under their long-term 200 Moving Averages, with one outlier Gold. The bears are in control and the market is hovering above Feb lows, which will be watched closely into the After Hours. This is not a market to try to pick bottoms, leave that to the proctologists. See you this afternoon.

Market volatility picked up Tuesday following a day of losses in overseas markets, poor consumer confidence numbers, and renewed pressure on the euro. The table was set for morning losses on Wall Street after markets across Europe and Asia fell on disappointing economic data out of China. The Shanghai Composite Index fell more than 4 percent. Losses were suffered across Europe as well, with a 4 percent loss in France’s CAC 40 Index helping to pace the decline. The euro dipped back below 1.22 against the buck. Meanwhile, the domestic news didn’t help much after the latest Consumer Confidence report showed a drop to 52.9 in June, down from 62.7 in May and significantly worse than the 62 reading that economists had expected. The Dow Jones Industrial Average slipped further on the news and is off 237 points midday. The CBOE Volatility Index (.VIX) rallied 4.5 points to 33.5. Options volume has picked up noticeably as well, with about 4.3million calls and 4.9 million puts traded at 12:30 ET.

Bullish
BP is seeing relative strength and a noteworthy call spread surfaced in the oil giant Tuesday. After falling below $27 per share yesterday, down 54 percent since late April, shares are up 69 cents to $27.74 today. One options strategist seems to think the rebound can continue and bought the January 30 – 40 call spread at $3.40, 20000X. In other words, they bought 20,000 of the January 30 calls at $5.15 each and sold 20,000 January 40 calls at $1.75. This spread might be a short seller initiating a hedge. It pays off if shares move beyond $33.40 by January expiration.

A large put seller surfaced in LiveNation (LVY), the day after Morgan Joseph analysts upgraded the stock to Buy with a $14 price target. Shares are down 34 cents to $10.80 and this strategist sold 13,000 August 10 puts at 60 cents each. Since volume exceeds open interest, this looks like a new position and this investor seems to be stating that they are a willing buyer of LVY if shares fall to $10 or less by the August expiration.

Bearish
Bank of America (BAC) shares are off 55 cents to $14.69 amid volatility in the global equity markets and uncertainty about upcoming financial regulation. While both chambers of Congress were expected to pass FinReg this week, the death of Senator Byrd Monday has potentially hurt the Democrats efforts, as they now have one less vote. In any event, BofA shares are down and the BAC July 14 put is among the most actively traded contracts, with more than 44,000 traded through midday.

Meanwhile, Select Sector Financials (XLF), which is a fund that holds all of the financial names from the S&P 500, is down 43 cents to $14.06 and options volume includes 214,000 puts and 34,000 calls. July 13 and 14 puts are the most actives. The action also includes an August 12 – 13 – 14 put butterfly spread, which traded 10,000X in morning action and seems to be a bet that shares will continue falling towards $13 through mid-August.

Unusual Volume Movers
AMD options volume is running 5X the usual, with 88,000 contracts traded and call volume accounting for about 96 percent of the activity.

ProShares Ultra S&P 500 (SSO) options activity is running 2X the usual, with 40,000 contracts traded and put volume representing 51 percent of the volume.
Hewlett Packard (HPQ) options volume is running 2X the usual, with 32,000 traded and put volume representing 77 percent of the activity.

Unusual volume is also being seen in CIT, Retail Holders Trust (RTH), and Electronic Arts (ERTS).

Implied Volatility Movers
The CBOE Volatility Index (.VIX) is rallying, as the S&P 500 falls 29 points through midday Monday. Options volume is picking up noticeably in the index market, as nervous investors scramble to buy portfolio protection. 250,000 puts traded on the S&P 500 Index (.SPX) so far. Since VIX tracks the expected volatility priced into SPX options, the increasing interest in SPX puts has the volatility index up 4.50 points to 33.5.