Will Bonds Rally, Yields Go Down? 07-28-2011

Cusick's Corner
I thought the market was going to get a little lift into the After Hours with Finance, XLF, and Tech, QQQ/XLK, leading but that is not the case, squeezing more longs out of the market. I have ratcheted down my size in trades at this stage, and will be watching the headlines for any movement on the debt debate. As I mentioned last week with the uncertainty on the debt ceiling, purchasing some market insurance like puts on a major index and buying some Gold exposure might be worthwhile to consider. The GDP data will be watched closely especially since the data this week with bad orders and better claims has the market apprehensive on economic growth. The Michigan sentiment data will be monitored to see if there is a shift, much like we have seen in the Put/Call ratio. See you Midday.

Stock market averages were holding gains with help from economic data midday, but the Dow Jones Industrial Average suffered its fifth consecutive loss on another day of cautious trading Thursday. After falling 198 points yesterday, the Dow Jones Industrial Average opened steady after the Labor Department reported that jobless claims fell by 24,000 to 398,000 last week. Economists were looking for a smaller decline of 7,000. A separate report released later showed Pending Home Sales up 2.4 percent in June. A 3 percent decline was expected. The day's earnings news is mixed. Exxon Mobile (XOM) lost 2.2 percent and was the second biggest loser in the Dow after the oil giant released its results Thursday morning. Sprint (S), BMC Software (BMC), and Akamai (AKAM) were also among the names seeing post earnings weakness today. Goodyear Tire (GT), Green Mountain Coffee Roasters (GMCR) and Skechers (SKX) ran higher on better-than-expected profit news. Yet, while stock market averages held modest gains at midday on economic data and mixed earnings, the Dow started to falter in afternoon trading amid ongoing concerns about the US debt situation. The House is voting on a budget plan Thursday afternoon, but it is still unclear whether or not politicians can reach a compromise before the August 2 deadline to raise the debt ceiling. Anxiety levels are growing as each day pays with no deal. Consequently, the Dow Jones Industrial Average gave back early gains and lost 63 points on the session. The tech-heavy NASDAQ added 1.5 points.

Bullish
Emerson Electric (EMR) shares, which lost 6.7 percent yesterday after the company warned of slower sales, gave up another 81 cents to $49.42 today. A noteworthy option trade in the St. Louis-based industrial equipment company surfaced in late-day action when an investor apparently bought 10,000 EMR September 55 calls at 35 cents and sold 10,000 September 43 puts at 51 cents. In other words, they collected a 16-cent credit on a Sep 43 - 55 bullish risk-reversal on EMR and appear to be anticipating a rebound in the stock through mid-September. If not, they could be on the hook to buy 1 million shares at $43 (the strike price of the put X 10,000 contracts). The bullish trade might also be a play on earnings, due Aug 3, or possibly to hedge a short position in EMR shares.

Bullish trading was also seen in Skecher's (SKX), Starbuck's (SBUX), and Tennet Healthcare (THC).

Bearish
Helix Energy Solutions (HLX) saw interesting options flow today. Shares of the Houston, TX oil and gas company lost a penny to $19.69 and options volume was 10X the average daily, with 12,000 puts and 500 calls traded in the name. The top trade in HLX Thursday was a 9,000-contract block of January 2013 7.5 puts bought at 50 cents per contract. This position looks opening because there is only 1,000 contracts of existing open interest in the contract. A shareholder might have bought these puts as longer-term "disaster insurance". The contract expires in 2013 and is more than 60 percent out-of-the-money. January 15 puts, which are 23.8 percent out-of-the-money, were apparently being bought-to-open in HLX as well.

Bearish flow also surfaced in Royal Caribbean (RCL), EMC, and Clearwire (CLWR).

Index Trading
CBOE Volatility Index (.VIX) battled back from morning losses and finished with another day of gains Thursday. VIX, which tracks the expected volatility priced into S&P 500 Index (.SPX) options, hit a morning low of 21.2 in the first hour of trading. From that point forward, the volatility index started climbing and, at the closing bell, was up .76 to 23.74. VIX moved higher, as the S&P moved lower in afternoon trading amid ongoing concerns about the US debt situation. The recent rally in the volatility index started Monday after politicians failed to reach agreement and break a stalemate on budget plans over the weekend. VIX is now up during the past four days and has rallied 32.5 percent on the week. Meanwhile, the top options trade in the VIX pits today was a block of 9,500 August 50 calls at 15 cents when the market was a nickel to 15 cents. An investor might have bought these deep out-of-the-money calls on the VIX amid concerns about the potential for a substantial spike in volatility over the next few weeks. August options on the VIX expire in 20 days.

ETF Action
Trading was active in the iShares Emerging Markets Fund (EEM) today. Shares gained 4 cents to $46.91. Options volume in the ETF was 239,000 calls and 121,000 puts. Average daily volume (both puts and calls) is about 170,000 contracts. The top trades of the day were part of a massive spread, in which the investor bought 35,100 September 50 calls at 57 cents and sold 35,100 September 52 calls at 19 cents. In other words, they initiated a Sep 50 - 52 call spread for a net debit of 38 cents, 35,100X. The spread was repeated more than once and volume in both contracts surpassed 50,000. Excluding commissions, the spread has an upside breakeven at expiration at $50.38, or 7.4 percent above current levels. The potential profit is $1.62 if shares rally beyond $52 through the Sept expiration, which represents a 10.9 percent gain over the next 50 days.