Priced Into the Market 11-01-2010

Cusick's Corner
Over the weekend a customer asked me, “What do you mean that the Fed quantitative easing, earnings/economic data and the elections are already priced into the market?” I told him to take a look at a SPY chart (the ETF that tracks the S&P 500) and see how the market ran from 112 in mid Sept, then consolidated in the last 3 weeks in OCT, all before the good economic data, earnings and the official Fed announcement (due out Nov 3rd). The market has stalled at our current levels for the past 5 sessions which does not mean that we could not get a “pop” post the elections and FOMC, but this could be a classic buy the rumor and sell the news event. This indecisive action, while muted with these upcoming events, highlights the need to be disciplined. Disciplined traders need to use all their tools in their arsenal, most notably protection. Now insurance, in the form of put options, is relatively cheap, VIX 21.60. Buying puts could be a viable approach, especially if the market does decide to challenge support, 117 on the SPY, and move down to the previous resistance points that trigger the Sept/Oct rally, 112 on the SPY. Watching the charts and these key price points can help add some visibility. See you After Hours.

Major averages are holding modest gains with help from stronger-than-expected manufacturing data. Stocks opened broadly higher Monday morning on positive manufacturing numbers in China. The domestic news wasn't so bright after a report showed personal incomes falling .1 percent and spending up .2 percent in September. Economists were looking for gains of .2 percent in incomes and .4 percent in spending. Yet, with help from strength in overseas and commodities markets, the Dow Jones Industrial Average opened higher and moved to its best levels of the day after the Institute of Supply Management [ISM] index of manufacturing activity was released. ISM showed improvement to 56.9 in October, up from 54.4 in September and much better than the 54.0 that economists had expected. A separate report showed construction spending up .5 percent in September and also better than the .7 percent decline that economists had expected. After an initial run higher, the rally on Wall Street ran out of steam. Trading turned cautious ahead of mid-term elections and a Fed meeting on interest rates later this week. The Dow is up 50 points midday and 76 points from session highs. The NASDAQ is up 3. The CBOE Volatility Index (.VIX) seized another .20 to 21.40. Options volume is respectable. 3.6 million calls and 3.1 million puts traded by 12:00 ET.

Bullish
Southwest Energy (SWN) shares are up 4.4 percent to $35.35 and appear to be rallying on news rival oil and gas producer Exco Resources (XCO) is being bought for $4.4 billion. XCO is up 35 percent on the merger announcement. Meanwhile, SWN moved higher in early trading and options volume is running 3X the average daily. About 22,000 calls and 6,275 puts traded in the name so far. January 36, 38 and 39 calls are among the most actives. December 30 puts and November 36 calls are seeing active trading as well.

Avanir Pharmaceuticals (AVNR) shares surged 121 percent to $5.35 after the FDA approved the company's treatment for a neurological disorder called pseudobulbar affect. Shares notched a new 52-week high on the news and options volume surged. 64,000 calls and 17,000 puts traded on the biotech so far. November $3 and $5 calls are the most actives, with 12,745 and 26,415 traded respectively.

Bearish
Powershares QQQ (QQQQ) is seeing brisk trading. Shares of the exchange-traded fund, which hold all of the NASDAQ 100 names, notched a new 52-week high and are up 18 cents to $52.36. Meanwhile, 268,000 puts and 79,000 calls traded on the fund. January 48 and 50 puts are the most actives. More than 58,000 traded in each (116K total). The volume includes a lot of spread trading. For example, 5000 Jan 50 puts traded at the $1.29 ask and 5000 Jan 48 puts mid-market at 82 cents. The action has the signs of a bearish spread, at a 47-cent debit, and one that offers a max pay-off if shares fall to $48 or less by the January expiration.

Wilmington Trust (WL) is reeling on news it is being taken “under”. Shares are down $3 to $4.13 after announcing a merger with MTB in a transaction valued at $3.84 per share. The stock touched a new 52-week low on the news and options volume is 11X the average daily, with 11,000 puts and 3,400 calls traded in the bank so far.

Unusual Volume Movers
Ambac Financial (ABK) options volume is running 2.5X the usual, with 49,000 contracts traded and call volume accounting for 52 percent of the activity, according to data from website WhatsTrading.com.

Nucor (NUE) options activity is running 2.5X the usual, with 31,000 contracts traded and call volume representing 90 percent of the volume.

Baker Hughes (BHI) options volume is 2X the typical levels, with 27,000 contracts traded and call volume accounting for 78 percent of the activity.

Increasing volume is also being seen in Southwest Energy (SWN), Boston Scientific (BSX), and St. Joe (JOE).

Implied Volatility Movers
Rambus (RMBS) rallied to $20.01 in morning trading and 9,800 calls have traded in the chipmaker so far. The volume represents 7X the expected for midday. There's no company-specific news to explain the increased interest. It's focused on the November 20 and 21 calls. Shares are now flat at $19.74, but the increased activity has implied volatility moving up 9 percent to 36.