How Many Chops Does It Take to Bring the Market Down? 05-23-2011

Cusick's Corner
The elements that we discussed all last week came together on the open - the EU has a continuing debt crisis and China's slowdown is creating momentum to the downside. Two sectors that appear to be under the most pressure right now are Crude and Euro Currency which is putting even more pressure on those who are strong longs. I am watching the short trade closely to see if the shorts get too crowded, they might get possibly spooked if a bid comes in for an afternoon squeeze. Also watch the Commodity currencies, i.e. Aussie Dollar, as an indicator of continued weakness in this sector. See you After Hours.

Stocks are broadly lower midday. The underlying tone of trading was cautious early after stock market averages suffered steep declines across the Euro-zone. Italy's FTSE MIB Index paced the decline, falling 3.2 percent after Standard and Poor's lowered its credit rating on Italy to negative from stable. With no economic data to guide US trading, the volatility from overseas spilled over onto US shores and stocks fell sharply at the open. Meanwhile, crude oil lost $2.70 to $97.40, but flight-to-safety is giving gold a bid. The yellow metal is up $5.5 to $1,514.40 an ounce. The dollar index added 1 percent to $76.18. The Dow Jones Industrial Average is off 150 points and the tech-heavy NASDAQ lost 45.5. The CBOE Volatility Index (.VIX) added 1 point to 18.43. Trading in the options market is cautious, but overall volume is light, with 4.3 million calls and 4.2 million puts traded through 12:30pm ET.

Bullish Flow
Cheniere Energy (LNG) is rallying for a second day. Shares jumped 30.6 percent Friday after the Department of Energy said natural gas can be exported in the form of Liquefied Natural Gas [LNG] to any country that has the capacity to import the commodity. After opening at $9.63 Monday morning, shares are up another $1.75 to $11.79. Meanwhile, trading in the options market is brisk. 35,000 calls and 5,525 puts traded in LNG through midday. June 13 calls, which are now 10.3 percent out-of-the-money, are the most actives. 9,945 have changed hands. June and September 10 calls are seeing brisk trading as well.

Bank of America (BAC) loses 15 cents to $11.43 and morning trades including an August 12 - 13 call spread, which was apparently bought at 25 cents, 5000X. The spread has traded multiple times across different exchanges today. Volume in both contracts is now more than 24,000. A source on the exchange floor says that a buyer has been initiating the trades and, if so, this is a bullish play on the bank. For a 25-cent net debit, the spread offers a potential 75-cent pay-off (excluding commissions), if shares rally to $13 or more through the August expiration.

Bearish Flow
SPDR Gold Trust (GLD) is trading up 7 cents to $147.56 after gold gained $5.5 to $1,514.40 an ounce Monday. Meanwhile, in options action, one investor apparently bought the June 145 - 140 put spread on the gold fund at $1 even, 20000X. That is, they bought 20,000 June 145 puts at $1.46 and sold 20,000 June 140 puts at 46 cents. Since GLD is an exchange-traded fund that holds gold stored in bank vaults, the spread is a bearish play on the yellow metal. It offers a potential $4 payout if GLD falls to $140 or less through the June expiration, which is in 25 days.

Norfolk Southern (NSC) loses 12 cents to $71.14 and has suffered a two-day 2.1 percent decline after the railroad company updated its second quarter outlook at a Bank of America conference Friday morning. The company's CFO sees a 1 percent drop in volume due to flooding in the Midwest. Meanwhile, in today's options action, 5,935 puts and 1,475 calls have traded in Norfolk Southern. December 67.5 puts are the most actives. 4,154 traded and, with 100 percent traded at the ask, it looks like buyers are driving the flow and bracing for a move to $67.5 or less through the December expiration. A shareholder might be initiating the trades as a hedge.

EMC options volume is running 3X the (22-day) average, with 73,000 contracts traded and put volume accounting for about 58 percent of trades.
AMR options volume is 2X the average daily, with 54,000 contracts traded and call volume representing for 95 percent of the activity.
Archer Daniels Midland (ADM) options volume is running 2X the average daily, with 24,000 contracts traded and call volume accounting for 62 percent of the activity.
Increasing options activity is also being seen in Focus Media (FMCN), Costco (COST), and Ann Taylor (ANN).

Implied Volatility Mover
CBOE Volatility Index (.VIX) moved higher Monday morning. The market's "fear gauge" hit a high of 20.03 and surpassed the 20 "psyche" level for the first time since March 23. The rally to two-month highs was fueled by fear that the European Debt Crisis is worsening after Standard & Poor's lowered Italy's credit rating. However, VIX has eased back and is up .91 to 18.34 through midday. Options volume in VIX includes 107,000 calls and 47,000 puts. June 15 puts and July 25 calls are the most actives.