Existing Home Sales Well Below Expectations 08-24-2010

Cusick’s Corner
Existing home sales came in well below expectations, sub-4 million units and this decline was the highest percentage drop in over 10 years. This spurred on the flight for safety trade into this Midday -- all major indices are in the red and bond yields are continuing to crack, 10yr at 2.52%. Triggering some additional concern this morning, Transports, $TRAN, continue their weakness, which is another potential signal that the economy continues to struggle while attempting to bottom and show some strength. The market, technically speaking, is a mess and the bears have control at this short-term stage. Defense is the best offence, so make sure that you are managing the downside and keep as much of your powder dry as possible. See you After Hours.

The major averages opened lower and then the selling intensified on bleak housing data Tuesday. The table was set for early losses, as major averages moved broadly lower overseas. Japan’s Nikkei lost 1.3 percent after the Japanese yen surged to 15-year highs against the dollar, which raises the risk to the country’s exports. Meanwhile, shares finished broadly lower across Europe, including a 5.87 percent loss in Ireland’s overall index. The Dow Jones Industrial Average followed Asian and European markets lower. Then, the industrial average dipped below 10,000 in morning action after data showed existing home sales plunging 27 percent in July. The Dow has come off its lows and is now down 109 points to 10,065. The NASDAQ lost 28. The CBOE Volatility Index (.VIX) hit a high of 28.77 and was recently up 1.24 to 26.90. Trading in the options market is defensive, with about 3.9 million calls and 4.85 million puts traded through 12:30 ET.

Bullish
Marvel Technology (MRVL) shares are seeing relative strength and calls are active on takeover chatter. Texas Instruments (TXN) is possibly interested in MRVL, according to today’s chatter. It’s unsubstantiated, but shares are up 37 cents to $16.09 and 27,000 calls have traded in the chipmaker, which is double the expected for midday and more than twice the number of puts traded in the name. Short-term speculators are focused on the September 16 and 17 calls. November 14 and 15 calls are seeing interest as well.

3Par (PAR), which rallied Monday on news Hewlett Packard (HPQ) is seeking to buy the company, is up another 81 cents to $26.90 and options volume is 18X the average daily on talk DELL might raise its bid for PAR. Dell Computer has already made an offer for 3Par, but H-Ps bid is 33 percent higher. Now, Bloomberg is reporting DELL might sweeten its offer to top H-Ps. Consequently, PAR is up and 15,000 calls have traded in the name through midday. September and October 30 calls are the most actives.

Bearish
Puts on the SPYders (SPY) are actively traded Tuesday. Shares are down $1.23 to $105.89 and more than 1 million contracts have traded, which is more than double the number of calls that have changed hands. The top trade of the day is a spread where an investor bought 45,000 September 104 puts, sold 20,000 September 110 puts, and sold 45,000 September 97 puts. They might have closed the position in the 110 puts, which are now $4.11 in-the-money, to open a new larger position in the September 104 – 97 put spread.

Cemex (CX), the Mexican cement company, hit a new 52-week low and is down 41 cents to $7.72. Options volume is 4X the average daily, with about 9,800 calls and 9,175 puts traded in the name so far. The top trade looks like a bearish “risk-reversal”, where a strategist sold 5,000 September 8 calls at 23 cents to buy 5,000 September 7 puts at 20 cents. The position, at a 3-cent net-credit, looks like a new position and is a short-term play. September options expire in 24 days.

Unusual Volume Movers
iShares Silver Fund (SLV) options volume is running 2X the usual, with 81,000 contracts traded and put volume accounting for about 75 percent of the activity.

SPDR Homebuilder Trust (XHB) options activity is running 2X the usual, with 51,000 contracts traded and put volume representing 50 percent of the volume.
GameStop (GME) options volume is running 4X the usual, with 21,000 traded and put volume representing 82 percent of the activity.

Unusual volume is also being seen in Southwest Energy (SWN), DR Horton (DHI), and Monster Worldwide (MWW).

Implied Volatility Movers
Medtronic (MDT) shares are under pressure and implied volatility is up after the medical device maker posted strong earnings, but an unexpected drop in revenues. The company also lowered estimates for the year. Shares are off 10 percent to $31.46 and options volume is 5X the normal, with 27,000 contracts traded (57 percent calls). Meanwhile, implied volatility jumped 16.5 percent to 35.