Chief Chops Market 06-07-2011

Cusick's Corner
The Chief spoke and the market was not impressed, but there was nothing said that was unexpected. Next issue is that the guidance coming out from various companies speaking at industry events has been even less inspiring. The market is getting into a more and more defensive mode and it feels like a test of the lows is in the cards. The reality is that the market and the economy are under stress and while there is a hope for a stronger second half, the environment right now is not as rosy -- trade accordingly. See you Midday.

Stock market averages gave back early gains and finished lower for a fifth consecutive trading session Tuesday. With no economic data or earnings to guide early trading, market action was slow and the Dow Jones Industrial Average was sporting a modest gain through midday. The only economic stat of the day - a report on Consumer Credit - was released Tuesday afternoon. It showed an increase to $6.3 billion in April, up from $4.8 billion the month before. The number proved to be a non-event for financial markets and the tone was wait-and-see heading into Federal Reserve Chairman Bernanke's speech at a conference in Atlanta. The Fed head's comments hit the newswires 15 minutes before the closing bell. Bernanke said he expects growth to pick up in the second half of the year and that might have quashed some hopes for another round of quantitative easing. For whatever reason, the Dow Jones Industrial Average sank in the final minutes of trading today and closed the day down 19 points, off 108 points from session highs. The tech-heavy NASDAQ lost 1 point.

Bullish
Stillwater Mining (SWC) saw relative strength and increasing options action today. Shares of the Billings, MT miner of palladium, platinum and other metals added 73 cents to $20.03. Meanwhile, 10,000 calls and 2,540 puts traded in SWC options today. June 19 puts, which expire at the end of next week and are 5.1 percent in-the-money, were the most actives. 2,000 traded and some investors might be taking positions to protect recent gains in the stock. However, July 22, 23, 24, and 25 call options were actively traded as well and seemed to reflect some bullish trading in anticipation of a rally in shares through the July expiration in 38 days. Shares are up 13.4 percent since mid-May and the some investors might be focused on SWC as a way to play strength in the metals. Platinum, for example, is up 4.6 percent since May 23.

Bullish trading was also seen in JDS Uniphase (JDSU), AMD, and Temple Inland (TIN).

Bearish
A couple of the homebuilders saw bearish trading Tuesday. Pulte Group (PHM) shares traded down 20 cents to $7.21 and today's options volume included 8,680 puts and 1,090 calls. January 7.5 puts traded more than 6,000 contracts and were the most actives. Lennar (LEN) lost 39 cents to $17.04 and options volume was 6,560 puts and 1,635 calls. January 17.5 puts traded 2,300 contracts and were the most actives in Lennar. There was no news on these two homebuilders, but the sector has been weighed down by disappointing economic data and has not performed well lately. SPDR Homebuilders Trust (XHB) is in the midst of a 5-day 7.6 percent losing streak. Some shareholders might now be looking to hedge stock and buying puts on individual names like LEN and PHM.

Bearish flow also surfaced in Ctrip.com (CTRP), Lorillard (LO), and Hertz (HTZ).

Index Trading
The Russell 2000 Small Cap Index (.RUT) saw more options action than normal. The index, which tracks the price action of two thousand of the smallest companies trading on the US exchanges, finished the day up 2.23 to 797.55. Meanwhile, in options action, 132,000 puts and 99,000 calls traded in the Russell. July 690 puts were the most actives. More than 19,000 traded against open interest of 4,294. The top trade was a 2,250-contract block at the $2.10 asking price. The July 690 put on the Russell 200 is more than 100 points, or 13.5 percent, out-of-the-money. Some institutional investors were possibly buying the contract as a short-term hedge or "disaster" insurance.

ETF Action
A second massive put butterfly traded in the SPDR 500 Trust (SPY). In the midday report, we noted that one strategist initiated an SPY July 112 - 120 - 128 put butterfly spread at $1.22, 40000X. A bit later a similar spread surfaced. In this spread, the investor sold 60,000 July 121 puts at 70 cents each. They also bought 30,000 July 129 puts at $2.64 and bought 30,000 July 113 puts at 20 cents. The position is a July 113 - 121 - 128 put butterfly spread for a net debit of $1.44, 30000X. It was probably initiated as a short-term portfolio hedge. The spread makes its best profits if shares fall to $121 through the July expiration, which represents a 6.2 percent decline over the next 38 days. SPY lost 9 cents to $128.96 on the day.