Key S&P Levels -- 1126 & 1147 09-20-2010

Cusick's Corner
This market appears to be trying to get the pendulum swing to the upside -- key S&P levels to watch are 1126 support and 1147 resistance. If the market breaks the 1126 level, this could signal a deeper pullback. But if the market can accelerate to 1147 on the SPX, this would be a big momentum shift and at that stage, any bear would have to reevaluate their sentiment. Tomorrow will kick off with Housing starts, followed by the Fed into the Midday where all eyes will be waiting to see if they “QE” (quantitative ease) this market. See you Midday.

Stocks closed broadly higher ahead of ahead of tomorrow's Federal Reserve Open Market Committee [FOMC] rate announcement. While officials are expected to keep rates steady, there seems to be hope that they will announce plans to relaunch bond buybacks to drive market rates lower, spurring lending and business activity. In other words, it seems that the market is pricing in the possibility of a friendly Fed. Beyond that, there wasn't much news to guide the action. The only economic stat of the day showed the NAHB Homebuilders Confidence Index [HMI] flat at 13, 18-month lows, in September. Economists were looking for an increase to 14. The market showed little reaction to the news. The major averages were broadly higher midday and then saw a modest uptick late. At the closing bell, the Dow Jones Industrial Average was up 146 points and the NASDAQ had added 40.

Bullish Flow
Dolby Labs (DLB) saw increasing options action. Shares of the San Francisco, CA electronics company finished the regular session up $4.30 to $60.25 per share after Avondale analysts upgrade the stock to OutPerform. Meanwhile, in the options market, volume hit 21X the average daily, driven by activity in the March 50 puts and March 65 calls, which both traded about 3,500X. Most of the action happened on the ISE, where ISEE sentiment data indicate that the strategist was buying calls and selling puts. They were paying about 35 cents for this bullish risk-reversal and apparently opening new positions in anticipation of additional gains in DLB from now through the March 2011 expiration.

Bullish flow was also detected in Fushi Copperweld (FSIN), Sprint (S), and Pride International (PDE).

Bearish Flow
Put volume picked up in Tenet Healthcare (THC). Shares added 12 cents to $4.34 and options volume hit 6X the norm, with about 10,000 puts and 235 calls traded on the managed healthcare company. The biggest trade was a block of 1,746 October 4 puts at a nickel. The bid-ask spread was zero to 5 cents at the time and this investor appears to have initiated a new bearish purchase, possibly a shareholder buying puts and looking for a hedge.

Bearish flow also picked up in LDK Solar (LDK), JA Solar (JASO), and Medifast (MED).

Index Trading
Not much was happening index market Monday. About 375K calls and 563K puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is only 82 percent the recent average daily volume. SPX October and November 1120 puts were the most actives, with more than 46,000 traded in each. The S&P 500 Index finished up 17.12 points to 1,142.71. Meanwhile, the CBOE Volatility Index (.VIX), which tracks the expected volatility of the S&P 500, lost .51 to 21.50. About 84,000 calls and 35,000 puts traded on the VIX.

ETF Trading
SPDR Homebuilder Trust (XHB) saw some action ahead of housing starts and building permits data, due out Tuesday before the bell. The exchange-traded fund, which owns shares of leading homebuilding companies, added 50 cents to $15.57 and one investor apparently sold 8,000 October 15 calls at 83 cents to buy 16,000 October 16 calls at 30 cents. This 1X2 call ratio backspread, at a 23-cent credit, appears to be a bet that shares will either 1) fall back below $15 through the October expiration and the strategist keeps the 23-cent credit because all the calls expire worthless 2) rally through the October expiration and the backspread profits from the fact that the strategist has 2X more (long) 16 calls compared to the short (15) calls.