QE3 07-12-2011

Cusick's Corner
The Fed notes came out, and QE3 now looks to be on the table, which catalyzed that the market specifically getting the Euro, E7U11, over $1.40 and the Dollar, DXU11, pulled back to the 76 level. But that was short lived when Moody's downgraded Irish debt, bringing yields in the Bonds to the day highs (not helping my bond position), resurging the strength in the Dollar while taking equities and commodities down. Safety is the trade of the day but yield will come into play and money will have to be put to work. Based on these earnings results that we will be watching, money will have to flow to the best yielding assets and if these earnings are solid they will look to equities. With the market holding up in spite of the headlines, shorts may be getting antsy to cover in front of this earnings cycle. See you Midday.

Trading was mixed through midday, but another round of selling pressure surfaced late and stock market averages finished in the red Tuesday. The only economic stat on the calendar was the latest Trade Balance report, which widened to a $50.2 billion deficit in May from $43.6 billion the month before and also much wider than the $44 billion that was expected. There wasn't much reaction to the data and instead the focus remains on events across the Atlantic. Stock market averages seemed to get a bit of a lift from news of a successful auction of Italian bonds. In the US, the latest FOMC minutes also seemed to support the market after officials indicated that further monetary easing is still possible if needed. However, about thirty minutes before the closing bell, Moody's downgraded Ireland's debt and the move pushed the debt crisis back to the forefront. The Dow Jones Industrial Average faltered from that point forward and closed down 59 points. The tech-heavy NASDAQ lost 20.7.

Bullish
Gold Fields (GFI) shares jumped 66 cents to $15.12 amid strength in the sector after gold prices rallied Tuesday. The yellow metal is trading up $20.5 to $1,569.70 an ounce late-Tuesday. Meanwhile, options on Gold Fields saw a surge of activity. 36,000 calls and 1,400 puts traded on the day, which is 11.5X the average daily volume for the South African miner. August 14 calls, which are now $1.12 in-the-money, were the most actives. 29,120 traded. 68 percent of the volume traded at the ask and open interest is only 301 contracts. So, it appears that buyers were taking new positions and looking for GFI to continue its run higher through the August expiration, which is in 38 days.

Bullish trading was also seen in ON Semiconductor (ONNN), Liz Claiborne (LIZ), and Harmony Gold (HMY).

Bearish
JA Solar (JASO) shares touched a new 52-week low today and finished the day down 12 cents to $4.56. Meanwhile, options volume in the Shanghai-based solar energy company was 4,475 puts and 885 calls. December 4 calls, which are now 56 cents out-of-the-money, were the most actives. 3,058 traded and 74 percent traded at the ask. January 3 and 5 puts were busy as well. There was no news on JASO today. The bearish trading might be a sector play after TSL saw a volatile move lower amid heavy put volume today (see today's Midday report at xpoundblog.com).

Bearish flow also surfaced in Warner Chilcott (WCRX), Trina Solar (TSL), and Qualcomm (QCOM).

Index Trading
CBOE Volatility Index (.VIX) made a run higher during the second half of trading and finished the day up 1.48 to 19.87. The late-day rally in the volatility index was partly fueled by news that Moody's had downgraded Ireland's credit rating and left it at Negative. VIX has been rallying in recent days on concerns about the European Debt Crisis and the global economy. The volatility index is up 24.6 percent during the past three days. VIX tracks the expected volatility priced into S&P 500 Index (.SPX) and is moving higher amid increasing interest in puts on the S&P. 660,000 put options and 296,000 calls traded in the SPX options pits Tuesday. Institutional investors are active in SPX puts to hedge stock portfolios.

ETF Action
A noteworthy spread trades in the SPDR 500 Trust (SPY) late-Tuesday. Shares of the exchange-traded fund lost 57 cents to $131.40 and one investor apparently bought 40,000 July 128 puts at 21 cents and sold 40,000 July 126 puts at 10 cents. Therefore, they paid 11 cents for this July 128 - 126 put spread and might be bracing for additional volatility in the S&P before the weekend. Excluding commission, the breakeven of the spread at expiration is at $127.89 and 2.7 percent below current levels. The max potential pay-off is $1.89 if shares fall to $126 or less through the July expiration, which represents a 4.11 percent decline over the next three days.