Market is Complacent 12-15-2010

Cusick's Corner
All eyes are going to be on the EU for the next couple of days as foreign ministers meet to discuss debt issues, specifically how they are going to continue to support it. The Euro, FXE, pulled back in front of this meeting, which has given way to support in the Dollar, UUP. Another currency that has been on the move to the downside is the Aussie Dollar, which explains the weakness in the metals, GLD/SLV. This has been a complacent market -- VIX is at 17.94 (see info under Index Trading). We need to keep an eye on these EU meetings and movements in the currency markets for any signals of a continuation to the upside or increased pressure on the current longs. See you Midday.

Stocks finished with modest losses despite mostly encouraging economic data Wednesday. A report released before the bell showed the Consumer Price Index [CPI], which measures inflation at the consumer level, up just .1 percent in November and half as much as expected. The latest NY Empire State manufacturing index showed improvement as well. It rose to 10.57 in December, from –11.14 last month and better than the 3.0 that economists had expected. Industrial Production numbers, at .4 percent in November, were also better than the .3 percent that economists had predicted. However, the NAHB Index of Homebuilder Sentiment [HMI] remains unchanged at 16 this month. Economists were looking for an increase to 17. Nevertheless, stocks traded higher on the data early, but market action turned mixed midday. Some selling pressure surfaced late after bonds fell yet again. The benchmark ten-year Treasury note, which opened on solid footing Wednesday morning, sank in the final hour and lost 11/32nd on the day. It's yield is now up in 7 of the past 9 days and to 3.52 percent, from 2.95 percent last Monday. Higher Treasury bond yields are a negative for the economy because they are used to set many market rates, including rates on some mortgages. The selling in Treasurys seems to be keeping the equity market in check. The Dow Jones Industrial Average lost 20 points and the NASDAQ gave up 10.5 today.

Bullish Flow
William's Companies (WMB) calls were actively traded Wednesday. Shares of the natural gas producer lost 28 cents to $23.67 after natty gas prices lost 1.5 cents to $4.24. Meanwhile, options volume in WMB included about 25,000 calls and 3,350 puts. The top trade of the day was a block of 3,000 January 2012 25 calls, which was sold at $2.26 against a position in shares and part of a covered call strategy (buying shares and selling calls). Meanwhile, May 24 calls were the most actively traded. 16,245 contracts traded and with 78 percent trading at the asking price and existing open interest of 10,493, it appears that some investors were buying-to-open new bullish positions in WMB. The action comes ahead of natural gas inventory data Thursday.

Bullish order flow was also seen in Petrohawk (HK), Micron Technology (MU), and AmerisourceBergen (ABC).

Bearish Flow
Athena Health (ATHN) shares fell and put option volume rose Wednesday. The Watertown, MA business services company lost $1.68 to $42.35 and options volume rose to 6.5X the average daily. 4,505 puts and 850 calls traded in the name. Most of the action was in smaller lots. The top trade was 200 Jun 41 puts at $4.90. December 33 and 39 puts were the most actives. No news on the stock, but the flow seemed somewhat bearish and to reflect underlying concerns about the share price in the days and months ahead.

Bearish flow also picked up in Vishay Intertechnology (VSH), ViroPharma (VPHM), and Visa (V).

Index Trading
Call options on the CBOE Volatility Index (.VIX) were heavily traded Wednesday. VIX hit a low of 17.37 in morning trading, but rallied back up to 18.14. The volatility index finished the session up .33 to 17.94. Meanwhile, 311,000 calls and 67,000 puts traded in the VIX. The top trade was an apparent 1X2 January 27.5 – 35 call ratio spread at 10 cents, 20000X. In this spread, the strategist apparently bought 20,000 January 27.5 calls at 64 cents and sold 40,000 January 35 calls at 27 cents each. This spread is probably to hedge the risk on increasing volatility. It makes its best profits if the volatility index rallies to 35 by the January 2011 expiration.

ETF Trading
A large block of call options traded on the SPDR Gold Trust (GLD) today. Shares finished down $1.48 to $134.70 after gold (February) lost $24.30 to $1,380. GLD is an exchange-traded fund that holds gold and moves higher and lower along with the price of the precious metal. In options trading, an interesting trade late-Wednesday was a block of 25,000 January 135 calls on the $2.92 bid. This trade was tied to a large block of GLD shares and is possibly part of a buy-write or covered call strategy. That is, the investor was selling at-the-money (strike price equals share price) calls against GLD and looking for the price to stay around $135 per share through the January expiration, which is in five weeks and two days.