China Slowdown Slides Market 05-04-2011

Cusick's Corner
Support -- that is what the market is looking at into the Midday and After Hours sessions. This pullback is not the surprising but if support is not held, 134 in the SPY, a drive to April lows are in the sights of the bears. Volatility has not popped on the pullback today but it has been on the rise, so hedging could become more expensive if the market starts to challenge these support levels. See you After Hours.

Stocks are broadly lower on disappointing economic data Wednesday. ADP reported this morning that the US economy added 179,000 private sector jobs last month. Economists were predicting an increase of 200,000. The news comes two days before the Labor Department releases its key monthly payroll report. Separate data released later Wednesday showed the ISM Services Index falling to 52.8 in April, down from 57.3 and well below economist estimates of 57.4. Meanwhile, commodities are under pressure again today. Crude oil lost $2.13 to $108.92 per barrel and gold gave up $30.2 to $1,510.20 an ounce. Within the Dow Jones Industrial Average, Chevron Texaco (CVX) and Exxon (XOM) are moving lower along with crude oil. Some of the cyclical names, DuPont (DD), Caterpillar (CAT), and Alcoa (AA), are among the Dow's biggest losers. The industrial average is down 125 points and the tech-heavy NASDAQ lost 30. The CBOE Volatility Index (.VIX) gained .87 to 17.57. Trading in the options market is active and clearly more defensive than in recent days, with 5.3 million calls and 5.3 million puts traded through 12:30pm ET.

Bullish Flow
STEC, the Santa Ana, CA data storage device maker, is seeing relative strength and bullish options order flow today. Shares are up 4.1 percent to $20.20. Meanwhile, 9,530 calls and 565 puts have traded in the name. The August 18 calls, which are 12.2 percent in-the-money, are the most actives. 7,300 traded and it looks like some investors are paying $3.70 to open new positions. Open interest is only 64 contracts. August 26 calls are seeing interest as well. The strength in the stock and increasing call buying in STEC is noteworthy, as other names in the space (SNDK, STX, WDC) are trading lower today. STEC is due to release earnings on May 10.

SPDR Gold Trust (GLD), which is an exchange-traded fund that holds the yellow metal, is down $2.81 to $147.07 after gold lost $30.2 to $1,510.20 an ounce. GLD has now suffered a three-day 3.5 percent slide. One options trader seems to view the weakness as an opportunity for a bullish trade. In midday action, a May 150 - 155 call spread was initiated on the fund. The investor paid 78 cents per spread to buy 10,000 May 150 calls at $1.02 and sell 10,000 May 155 calls at 24 cents. It's a bold move, as the May 150 calls are now 2 percent out-of-the-money and May options expire in two and a half weeks.

Bearish Flow
An interesting three-way spread trades in the SPDR 500 Trust (SPY) Wednesday. Shares are down $1.11 to $134.62 and have now suffered a three-day 1.4 percent setback. In options action, one spread trader apparently sold 20,000 May 130 puts at 35 cents to buy 20,000 June 122 - 132 put spreads at $1.35. Therefore, they paid $1 for the three-way and might be looking for SPY to hold above $130 through the May expiration, but then fall from that point forward. Or, they might have rolled a position - closing out May to open a new bearish position in June.

Murphy Oil (MUR), an Eldorado, AR oil and gas refiner, is trading down $2 to $72.63 after crude gave up $2.13 to $108.92 per barrel Wednesday. Meanwhile, options volume in Murphy includes 6,225 puts and 870 calls. May 70 puts, which are 3.5 percent out-of-the-money and expire in 16 days, are the most actives. Volume is approaching 5,000 contracts and 82 percent traded at the ask, which indicates put buying. It's possibly bearish trading or hedging activity ahead of earnings. The company is due to report today, but a time has not been specified.

Unusual Volume
Las Vegas Sands (LVS) options volume is running 2X the (22-day) average, with 183,000 contracts traded and call volume accounting for about 54 percent of trades.

Gap Stores (GPS) options volume is 10.5X the average daily, with 54,000 contracts traded and call volume representing for 92 percent of the activity.

First Solar (FSLR) options volume is running 2.5X the average daily, with 52,000 contracts traded and call volume accounting for 51 percent of the activity.

Increasing options activity is also being seen in Macy's (M), El Paso (EP), and SPDR Basic Materials ETF (XLB).

Implied Volatility Mover
Gap Stores (GPS) implied volatility is elevated amid heavy trading in the options market today. Shares of the apparel retailer hit a morning high of $23.73 and were recently up 29 cents to $23.22. Options volume is running more than 10X the average daily, amid heavy trading in May and June 24 and 25 calls. Total volume is 49,000 calls and 4,540 puts. Meanwhile, implied volatility is up 17 percent to 35.