Weak Data in Focus 08-01-2011

Cusick's Corner
Well the market initially thought that a deal on the Debt ceiling was very close to being made but the reality is that the data is weak and the market is taking notice. I spoke about that last week that we can see the debt, we can anticipate where it is going and the impact on growth. But the market was not ready for weak consumer data, orders and sentiment lower, and now the purchasing managers, ISM, are chiming in and they have lowered their sentiments. We also have some decent revisions during this earnings cycle, and these are the things that from a sentiment perspective have held me back from being very bullish. What I really do not like is that Tech has broken support, $57.85 on the QQQ, and if Tech breaks down then this market is going to have additional volatility. See you After Hours.

Stock market averages are lower, as early enthusiasm about a debt deal in Washington faded and the focus shifted back to the economy instead. Stock index futures rallied overnight after President Obama announced Sunday that key lawmakers had agreed on a debt deal ahead of tomorrow's deadline to raise the debt ceiling. The plan, which includes $2.4 trillion in spending cuts over the next 10 years, faces a vote in the House and Senate later today. The Dow Jones Industrial Average opened sharply higher on the news, but then the gains were lost in morning trading after the Institute of Supply Management said that its gauge of manufacturing activity sank to 50.9 in July, from 55.3 the month before and well below economist estimates of 54. The data rekindled concerns that manufacturing and activity are slowing more than previously expected. Concerns that rating agencies might slash the US triple-A credit rating despite the budget deal and a 1.4 percent to loss in the euro (against the dollar) are possibly adding to anxiety levels on Wall Street as well. Consequently, the Dow Jones Industrial Average is down 130 points and 268 points from session highs. The tech-heavy NASDAQ lost 33. CBOE Volatility Index (.VIX) added .11 to 25.36. Trading in the options market is very active and reflects the cautious underlying sentiment, with 4.7 million calls and 4.8 million puts traded through 12:00pm ET.

Bullish Flow
A couple of retailers are seeing bullish trading despite weakness in the broader market today. Shares of JC Penney (JCP) are trading down 47 cents to $30.29 and, in options action, 6,900 calls and 2,040 puts have traded in the retailer so far. Most of the action has been in smaller sizes. The top trade of the day is a 432-contact lot of August 30 calls at $1.72 on the International Securities Exchange, where sentiment data indicate a customer bought a new position. 1,426 traded. Longer-dated January 2013 calls at the 20 and 25 line are seeing interest as well, possibly closing trades because both contracts are in-the-money. Opening buyers were shopping for JCP August 31 calls Friday. The increased interest in JCP call options comes ahead of July same store sales numbers Thursday and an earnings report on August 12.

Talbot's (TLB) shares are rallying and call options are busy in the retailer after Sycamore Partners disclosed a 9.3 percent stake in shares of the company. TLB is trading up 54 cents to $4 per share on the news. Options volume in TLB through midday is 4,330 calls and 300 puts. January 5 calls, which are now $1 or 25 percent out-of-the-money, are the most actives. 2,560 changed hands. August 4 and November 5 calls on TLB are seeing interest as well.

Bearish Flow
Teva Pharmaceutical (TEVA) shares tanked today after the company said its MS drug failed to meet primary goals in an FDA trial study. TEVA touched a 52-week low today and is down $2.54 to $44.10. Options volume is running 4.5X the average daily. 47,000 calls and 27,000 puts traded in the name so far. The top trades are part of spread, in which the investor apparently sold 6,000 January 47.5 calls at $1.53 and bought 6,000 January 55 calls at 36 cents. The spread, for a net credit of $1.17, is possibly a closing trade. That is, a disappointed investor might be exiting a bullish spread on the heels of today's news.

iShares Real Estate ETF (IYR) is down 84 cents to $59.59 and today's options volume on the fund includes 34,000 puts and 3,530 calls. The top trade of the day is a block of 25,000 December 50 puts at $1.08 on the ISE, which is an opening buyer, according to data from the exchange. Open interest in the contract is already 65,684 and the biggest open interest position in the fund. Some investors might be accumulating bearish positions in the contract on concerns about additional losses in the sector in the months ahead. IYR is a fund that holds shares of real estate companies and Real Estate Investment Trusts [REITs].

Unusual Volume
Merck (MRK) options volume is running 2X the (22-day) average, with 35,000 contracts traded and call activity accounting for 54 percent of the volume.

United Healthcare (UNH) options volume is 2.5X the average daily, with 21,000 contracts traded and put volume representing 69 percent of the activity.

Harmony Gold (HMY) options volume is running 6X the average daily, with 15,000 contracts traded and call volume representing 99 percent of the total volume.

Increasing options activity is also being seen in Suntech Power (STP), Well Point (WLP), and Finisar (FNSR).

Implied Volatility Mover
Annaly Capital (NLY) implied volatility is easing today. Shares plummeted to a low of $14.05 Friday morning on concerns about the risk to mortgage REITs if the US defaults on its debt. Mortgage REITs have significant assets tied to loans guaranteed by Federal government agencies. However, now that a debt deal appears to be making its way House and Senate, NLY is up 61 cents to $17.39. Options volume in the name includes 24,000 calls and 21,000 puts so far. Some investors are probably unwinding bearish positions in Annaly today, as implied volatility in NLY options has plummeted 33 percent to 25.