Market Continues to Favor Bearish Sentiment 08-19-2010

Cusick’s Corner
The Shorts that were sweating it out since the gap up are breathing a sigh of relief this Midday. The Claims data released this morning came in right at the 500K level, worse than expected and this really dampened some upbeat GDP revisions out of Germany, revised estimates from 1.9% to 3%. From a technical perspective, this means that the market continues to favor short-term Bearish sentiment. This could become a little more amplified over the next day due to expiration. There are a few sectors dragging on the equity market -- the lag and now downturn in Small caps (IWM) and Tech (QQQQ), as well as a tear in Gold (GLD) and the crumble of the long-term Bond yields. We are also seeing that the Industrials, XLI, are slowing which looks to be mirroring the pullback in the Aussie Dollar, ADU10, which could be a potential sign of continued global weakness. Make sure that you are managing any option positions that are expiring today and tomorrow -- see you After Hours.

Stocks are broadly lower on disappointing economic news Thursday. The table was set for sluggish trading after the Labor Department reported weekly jobless claims increased by 12,000 to 500,000 in the period ended August 14. Economists were looking for a decline of about 13,000. The early slide on Wall Street gathered additional momentum at 10:00 am ET after the Philadelphia Fed Survey of manufacturing activity showed an unexpected contraction of –7.7 in August. Economists had expected a reading of +7.5. Finally, a separate report showed the list of leading economic indicators up .1 percent in July, and also worse than the +.2 percent that economists had predicted. The Dow Jones Industrial Average tumbled on the data and is down 160 points midday. The CBOE Volatility Index (.VIX) jumped 1.83 to 26.42. About 4.3 million calls and 4.6 million puts traded through 12:45 ET.

Bullish
Symantec (SYMC) shares are up and calls are busy after Intel (INTC) made a bid for Symantec’s rival, McAfee (MFE). Symantec and McAfee are the two dominant players in the security software industry. Therefore, the proposed buyout of McAfee leaves Symantec standing as one of the one of the key players in the space. Investors seemed to like the news. SYMC is up 49 cents to $13.08 and 26,000 calls traded in the name. The focus is on September and October 14 and 15 calls, with some premium buyers apparently taking positions and hoping for the gains in the share price to continue in the months ahead.

A large block of puts traded on the Industrial Select Sector Fund (XLI). Shares of the fund are down 69 cents to $29.27 on a rough day for the equity market. Meanwhile, one investor sold a block of 57,000 January 19 puts at 32 cents per contract. This looks like an opening play and not necessarily a bullish play. Rather, it seems to be a bet that shares will hold above $19 through the January expiration. If not, the strategist could face assignment on those puts and asked to buy 5.7 million shares at $19 each. XLI is one of nine select sector funds that collectively hold the S&P 500 companies. XLI holds all of the industrial-related names.

Bearish
QQQQ Ultra Short Fund (QID) is seeing increasing options action ahead of earnings results from Hewlett Packard (HPQ), DELL, and Marvell Technology (MRVL), due to be released after the closing bell. QID, which is designed to more twice the inverse to the popular Powershares NASDAQ QQQ (QQQ), is up 59 cents to $17.97. Meanwhile, 15,240 September 19 calls traded on the fund. It includes a buyer of 6,500 at 73 cents per contract. Since this is a bullish trade on an inverse-leveraged fund, it is actually an aggressive and bearish bet on the market.

Massey Energy (MEE) is down 61 cents to $32.52 and 13,000 puts traded on the coal company so far today. January 2012s are the most actives, with some players apparently selling the Jan 40s to buy Jan 30s. This appears to be a roll of a bearish position down from the higher to the lower strike. Similar action is being seen in the January 2011s. The stock is down from a high of $54.80 in early April and this investor might be banking a profit on the 40 puts, which are now $7.48 in-the-money, and opening a new position in the out-of-the-money 30 puts.

Unusual Volume Movers
Motorola (MOT) options volume is running 3.5X the usual, with 73,000 contracts traded and call volume accounting for about 92 percent of the activity.

Akamai (AKAM) options activity is running 2.5X the usual, with 52,000 contracts traded and call volume representing 84 percent of the volume.
NetApp (NTAP) options volume is running 3X the usual, with 46,000 traded and call volume representing 63 percent of the activity.

Unusual volume is also being seen in Goldcorp (GG), Petrohawk (HK), and Xerox (XRX)

Implied Volatility Movers
The CBOE Volatility Index (.VIX) is rallying, as the S&P 500 Index (.SPX) falls 20 points on disappointing economic news. The options expiration might be exacerbating volatility as well. The volatility index is up 1.81 to 26.40 and VIX options activity is busy Thursday morning. 89,000 calls and 39,000 puts traded on the index so far. One of the top trades is a block of 13,000 September 32.5 calls at $1.80. It was part of an advanced spread, known as a butterfly, where the investor sold the contract and also bought 6,500 September 42.5 calls and 6,500 September 25 calls. It’s a bullish play on the VIX, as it makes its best profits if the index settles at 32.5 at the September expiration.