Are We There Yet? 09-23-2011

Cusick's Corner
The end of day bounce was a relief and while it was welcomed to see this action, the reality is the overall trend is down. So where could this market go? The SPX in the last 4 months has pulled back 225 points (taken from highs in July and lows in September) and since the market is in a confirmed bear trend, I subtract this 225 from the most recent high which was 1215 on 9/16, giving me a potential downside target of 991. If I look at the options market and use the expected move calculation, front month ATM straddle + 1 strike out straddle/2, we have an expectation of the SPX potentially moving 91 points which would get us to 1041 on a downside target. Again, I am projecting to the downside because the overall trend is down and nothing at this stage has come close to shifting that sentiment. This also does not mean that the market will not have rallies, it probably will. This exercise just helps in planning; all of this is subjective and must be taken with a grain of salt. See you Monday.

Stock market averages finished with modest gains Friday, but the underlying tone of trading remained cautious after a two-day 675-point slide in the Dow Jones Industrial Average. With no economic data to guide trading, some of the focus remains in the commodities market. Crude oil, which has given up almost $7 since Tuesday, made a run below $80 per barrel. Crude was recently down 35 cents to $80.16. Meanwhile, the action in the metals market has been very volatile. Silver lost 18 percent today alone and suffered it worse one-day loss since 1984! Gold gave up another $88.4 to $1,651 an ounce. In stock news, Hewlett Packard (HPQ) was in the spotlight after the company announced the appointment of Meg Whitman as Chief Executive. Shares lost 2.1 percent and were the second biggest losers in the Dow behind DuPont (DD). BofA (BAC) was the biggest winner within the industrial average and bounced 4.8 percent. Shares had tumbled to two-year lows of only $6 the day before. At the end of the day, BofA was one of 18 Dow stocks to finish higher and the industrial average added 37 points on the session. The tech-heavy NASDAQ gained 27.6.

Bullish
Hewlett Packard (HPQ) lost 2.1 percent to $22.32 and was one of 11 Dow stocks to finish with losses Friday. Late-Thursday, the computer-maker announced the appointment of Ex-Ebay executive Meg Whitman as new CEO. Investors didn't seem too impressed with the selection, as H-P shares fell to new 52-week lows near $21.50 today. However, the options action was interesting. Volume was high. 172,000 calls and 76,000 puts traded in HP today. The top trades were part of three-way spreads. One investor sold 4,500 January 18 puts on the stock at $1.15, bought 9,000 January 24 calls at $1.82 and sold 9,000 January 31 calls at 35 cents. In other words, Jan 18 puts were sold to help finance the purchase of twice as many Jan 24 - 31 call spreads. The three-way play traded multiple times on the session and seems to reflect the view that HPQ will recapture $24 through the expiration. If it falls below $18 instead, the investor is on the hook to buy the stock at that price- if the short $18 puts are assigned at or near the expiration.

Bearish trading was also seen in Dean Foods (DF), Lowe's (LOW), and Yahoo (YHOO).

Bearish
Overseas Shipping (OSG) added 65 cents to $15.89 and are attempting to rebound from a one-week 15.9 percent skid. Meanwhile, options volume in OSG hit 8X the daily average after 2,140 calls and 13,000 puts traded in the name. Typical put volume is about 750 contracts. The top trades in OSG included a spread, in which the strategist apparently bought 2,725 January 2013 15 puts at $5.10 and sold 2,725 January 2013 5 puts at 25 cents. That is, they paid $4.85 for a Jan13 15 - 5 put spread, 2725X. The spread will be worth $10 if shares fall to $5 (68.6%) or less through the January 2013 expiration. Shares of the dry bulk shipper are down 55 percent year-to-date and today's spread trader seems concerns about the risk of additional losses through 2013. A shareholder might have initiated the trade to help hedge a stock position in OSG.

Bearish trading was also seen in BofA (BAC), Silver Wheaton (SLW), and Mosaic (MOS).

Index Trading
Trading slowed in the index market heading into the weekend. 525,000 calls and 768,000 puts traded across the VIX, S&P 100 Index (.OEX) and other index products, which is only about 81 percent the recent average daily volume, according to Trade Alert data. CBOE Volatility Index (.VIX) held steady, even as the S&P 500 Index (.SPX) added 6.87 points to 1,136.43. VIX, which tracks the implied volatility price into S&P 500 options, edged down .10 to 41.25. The top index options trade of the day was in the VIX after a 15,000-contract block of October 50 calls on the volatility index hit at the $1.85 asking price. A nervous investor might have bought a position in upside VIX calls on concerns about additional volatility in the equity market through mid-October. Indeed, trading could remain volatile next week - as players square their books to end the third quarter. The last day to adjust portfolios will be on week from today on Friday, September 30.

ETF Action
ProShares Ultra Short Euro (EUO), which is designed to move up when the European currency moves lower, lost .15 to $18.94 per share Friday. The euro has been pummeled prior to today and the EUO fund has rallied 14.4 percent month-to-date - which is a substantial percentage move for the currency market. Some investors seem to be bracing for additional losses in the euro, as 34,000 calls and 2,085 puts traded on the short Euro ETF today. January 20 calls, which are now 5.6 percent out-of-the-money and expire in early-2012, were the most actives. Volume approached 20,000 against 17,506 in open interest. In addition, with almost 70 percent of the volume trading at the offer, it appears that buyers were driving the flow and looking for shares to rally beyond $20 in the months ahead.