VIX Drops 08-01-2011

Cusick's Corner
This is a headline market, so try not to be the hero and get too opinionated. All the major markets are at the critical support level of the 200-Day Moving Average and the last test was in June. Holding these levels into the close was important and I like the fact that VIX, volatility, pulled back into the close as well, flagging that some potential upside may be on the horizon. I will be watching the 1300 level on the S&Ps as a critical pivot point that could squeeze the shorts and spur on the bid to become more active. Personal Income & Spending as well as the PCE are all due out pre-market open and will most likely add some more volatility especially if we are not seeing increased consumption, putting more question marks on the recovery. See you Midday.

Stock market averages traded in a very wide range during a seesaw trading session, but finished with only modest losses Monday. Stock index futures rallied overnight after President Obama announced Sunday that key lawmakers had agreed on a budget deal ahead of tomorrow's deadline to raise the debt ceiling. News of the plan, which includes $2.4 trillion in spending cuts over the next 10 years, helped set a positive tone for morning trading and the Dow Jones Industrial Average opened sharply higher on the weekend announcement. The early advance ran out of gas in morning action, however, 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 economic activity is slowing more than previously expected. Sellers resurfaced and stock market averages were deep under water at midday. However, a modest afternoon rally along with a round of short-covering helped send the Dow back to positive territory in the final hour. Yet, the gains didn't hold and the industrials couldn't avert a seventh consecutive loss. The Dow finished down 11 points. The tech-heavy NASDAQ lost 11.8 points.

Bullish
A number of retailers saw bullish trading Monday. Talbot's (TLB) and JC Penney (JCP) were mentioned in the midday report. Macy's (M) was another. Shares of the department store chain finished the day up 41 cents to $29.28. There was no news on the stock to explain its relative strength, but increased call activity accompanied the move. One player bought at 6,500-contract block of September 30 calls at $1.06 per contract. The position looks opening and, since the contract is 2.5 percent out-of-the-money and expires in 46 days, today's call buyer seems to be anticipating some upside in shares in the weeks ahead. Total volume in Macy's was 9,280 calls and 1,520 puts today. Bullish trading in Macy's might be a play on earnings, due around August 10.

Bullish trading was also seen in Valero (VLO), Talbot's (TLB), and JC Penney (JCP).

Bearish
Cavium Networks (CAVM) shares lost 61 cents to $33.88 and today's volume in the chipmaker was 4,325 puts and 1,145 calls. One spread trade drove much of the volume. In this play, the strategist apparently sold 1,500 August 37 puts at $3.30 and bought the 1,500 August 34 puts at $1.65. In other words, the Aug 34 - 37 put spread was sold at $1.65, 1500X. Last week, the August 37 - 42 put spread saw similar activity. Shares were around $37 and open interest data indicate that the spread was a roll - or closing out the 42s to open the 37s. Now that the stock has fallen to about $34, the position is being rolled again. In this example, the strategist is adjusting the position to at-the-money puts with each leg lower in the stock. They're rolling down in strikes to reduce the overall risk of the options position. Cavium's earnings will come into play tomorrow after market.

Bearish flow also surfaced in Wellpoint (WLP), TEVA, and United Healthcare (UNH).

Index Trading
CBOE Volatility Index (.VIX) saw wild swings today. After closing at four-month highs of 25.25 Friday, the market's "fear gauge" saw a precipitous drop to a low of 23.41 Monday morning. From that point forward, VIX moved higher again before hitting a midday high of 25.36. Again, the volatility index reversed direction and, at the closing bell, was down 1.59 to 23.66. The wild action in the VIX mirrored the big swings in the equity market, as investors saw the Dow Jones Industrial Average rally for a triple digit gain at the open, then sink to a triple digit loss at midday, before closing with a modest 11-point loss. The S&P 500 Index also traded in a very wide 32.65-point range and lost 5.3 points on the session.

ETF Action
Select Sector Industrials Fund (XLI) finished Monday's session down 22 cents to $34.46 and put options volume picked up in the ETF today. 31,000 calls and 72,000 puts traded in XLI options action. The top trade was a 9,000-contract block of September 34 puts at $1.13. The contract is 1.3 percent out-of-the-money and expires in 46 days. An investor might have bought the position to bet against the GE, Honeywell, and the other industrial names within the S&P. Separately, another noteworthy spread traded, in which the investor apparently bought 5,000 December 33 puts at $1.72 and sold 5,000 December 29 puts at 66 cents. In other words, they bought the Dec 33 - 29 put spread for a $1.06 net debit and might be looking for XLI to fall towards $29 or less through mid-December.