Memories 08-03-2011

Cusick's Corner
Will history repeat itself? The pullback yesterday and over the last 8 sessions brought back memories of 2000 and 2007, where we had large breakdowns, relief rally and then a continuation to the downside. So why am I not screaming the sky is falling? The current pullback is after a range bound market, but the depth of the pullback is not as big as the past drops that flagged the trend changing. I am watching the 1250 level on the S&Ps as the support that needs to be held at this juncture to see if broken, look on a weekly basis and strength picks up to the downside (RSI below 35), but I am not seeing that yet. The Buck was not moving as you would think if there was a flight to safety, plus there's weakness in the Euro which leaves me comfortable having long exposure to the Euro at this stage. I will be watching the Claims data tomorrow (there's been less than favorable consumer numbers coming out lately); if we see a number north of 420K this will add more volatility and potential fuel for the Bears in front of Friday's Payrolls and Employment number. See you Midday.

Stock market averages battled back from midday losses to finish higher and snap an 8-day losing streak. The early news flow Wednesday was positive after ADP reported that that the US economy added 114,000 private sector jobs in July. Economists were expecting an increase of 100,000. However, another day of heavy selling across Europe's equity markets kept any early rally attempts on Wall Street in check as well. Then, stock market averages fell into the red after ISM reported that its services index fell to 52.7 in July, from 53.3 in June and below expectations of 53.7. Yet, trading was orderly in afternoon action and stock market averages had moved back to positive territory in the final hour. A round of short-covering after eight days of losses probably helped fuel the afternoon rally. At the closing bell, the Dow Jones Industrial Average was up 30 points and 194 points off session lows. The tech-heavy NASDAQ tacked on 23.8 points.

Bullish
Lowe's (LOW) shares lost 4 cents to $20.42 and options volume in the home improvement retailer rose to 3X the average daily levels. 28,000 calls and 7,270 puts traded in Lowe's today. The top trade was a spread, in which the investor apparently bought 5,000 October 22 calls at 50 cents and sold 5,000 October 25 calls at 7 cents. This Oct 22 - 25 call spread, for a 43-cent net debit, traded more than 10000X and might be rolling action - closing out Oct 25s which are 22.4 percent out-of-the-money and have 29,225 in existing open interest. That is, the investor is exiting a bullish position in the 25s and opening a new one in the 22s, which have a lower probability of expiring worthless. Many retailers will be reporting same store sales numbers Thursday morning. LOW is also due to release earnings on April 15 and rival Home Depot reports one day later.

Bullish trading was also seen in Chico's FAS (FAS), CBS and Ford Motor (F).

Bearish
Put volume picked up in BHP Billiton (BHP) today. Shares of the Melbourne-based metals and minerals company lost 84 cents to $86.71 and came under pressure early-Wednesday after Credit Suisse analysts downgraded the stock to Neutral from Outperform. 13,000 puts and 2,950 puts traded in BHP today. August 82.5 puts saw the most volume. 8,570 traded, including a 6,665-contract block at $1.31 when the market was $1.28 to $1.31. Since existing open interest is 2,929, the trade looks like an opening buyer and short-term bearish play on BHP. The contract is 4.9 percent out-of-the-money and August equity options expire in 16 days.

Bearish flow also surfaced in Boyd Gaming (BYD), Barnes & Noble (BKS), and Dish Networks (DISH).

Index Trading
Volatility fell, but volume in the index market remained brisk Wednesday. 1.08 million calls and 855,000 puts traded across the S&P 500 Index (.SPX), NASDAQ 100 (.NDX) and other cash index products today. The CBOE Volatility Index (.VIX) lost 1.41 to 23.38 after the S&P 500 erased early losses and closed the day up 6.29 points to 1,260.34. Meanwhile, VIX August 30 calls were the most actively traded index contract. 41,550 changed hands. Another noteworthy trade in the volatility index today was an October 18 - 25 - 32.5 call butterfly spread, which was bought at $1.625, 3000X. This advanced options play targets VIX at $25 (middle strike of the spread, which was sold 6000X) through the October expiration. Excluding commissions, the breakevens are roughly at 19.625 and 30.875. The max profit happens if VIX settles at 25. By creating a butterfly rather than buying calls or call spreads, the strategist appears to be targeting a range for the VIX from now through October.

ETF Action
Volume was heavy in the exchange-traded funds for a second day. 6.2 million puts and 3.9 million calls traded across the SPDR 500 Trust (SPY), iShares Small Cap Fund (IWM), and other ETF yesterday. Today, volume was 7.6 million puts and 4.6 million calls, which is almost twice the recent average daily volume, according to Trade Alert data. SPY, IWM, SPDR Retail Trust (XRT), Proshares Ultra Short Government Bond Fund (TBT), SPDR Industrials ETF (XLI), SPDR Energy ETF (XLE), Dow Jones DIAMONDS (DIA), and US Oil Fund (USO) all saw volume well above their recent average daily levels. SPY August 124, 125, and 130 puts were the most actively traded ETF contracts. The SPYders closed the day up 68 cents to $126.17.