Stocks Drop On Jobs, EU Worries 06-04-2010

Cusick’s Corner
There was very little green in the market this afternoon, other than the Bond and Gold markets, with the employment numbers so bad and the EU continuing to suck us right back in to the proverbial you-know-what. The market was not able to put together any sustained push to the upside and is in challenge mode, resting at, or slightly below support levels of 1067 on the ESM10, which really has crushed the psyche of the long trader. I wanted to take some time to add a little color to the latest potential victim in the EU -- Hungry. While Hungry, an EU member, does look at this point to be the next to fall, the reality is that they are a much smaller risk vs. the other PIGS. The overall exposure is about half of Greece, Portugal, and a 1/10 of Spain and most of the risk is held by the Germans, Italians and French, plus the US and UK have almost no exposure. That puts the US markets in a perceived position as a flight to safety, especially the US Dollar market. See you Midday and GO Hawks!

Disappointing jobs data and ongoing weakness in the euro weighed on trading Friday. European markets suffered another round of losses, led by a 2.6 percent drop in France’s CAC 40 Index, after Hungary’s ruling party became the latest government to warn that it faces a debt crisis. The news sent the euro tumbling below 1.20 against the buck. Focus was also on grim economic news after the Labor Department reported that the US economy added 431,000 payrolls in May, which was due largely to temporary and government jobs and was much less than the 500,000 increase that economists had expected. In all, the US economy added a dismal 41,000 private sector jobs last month and the unemployment rate edged down to 9.7 percent from 9.9 percent. The major averages slipped on the data and were in the red midday. The selling gathered additional momentum in afternoon action and with 15 minutes left to trade, the Dow Jones Industrial Average is down 363 points and falling to session lows.

Bullish Flow
As noted in the midday report, a number of healthcare management companies saw bullish order flow Friday. Cigna (CI) was one of them. After trading higher in morning action, the stock has been caught in the downdraft and is down 74 cents to $34.06 late Friday. In options action, 7,186 calls and 580 puts traded on the session. The top trade is 355 June 35 calls at the $1.10 asking price. 6,100 traded total. While there was no company specific news to explain the call buying, it seems to be a sector play as a number of other names in the group saw increasing interest in June calls on Friday (see below).

Aetna (AET), WellPoint (WLP), and Healthnet (HNT) also had bullish order flow.

Bearish Flow
McGraw Hills (MHP), the credit rating agency and parent of Standard & Poor’s, lost 67 cents to $27.34 Friday and options volume rose to 2.5X the average daily, driven by buyers of August 30 puts. 5,040 traded total, compared to 2,630 in open interest. In addition, with nearly all of the volume (99 percent) trading at the asking price, the action looks like put buying and comes ahead of the company’s conference call Monday at 12:30 ET.

Bearish flow also picked up in Johnson & Johnson (JNJ), Norfolk Southern (NSC), and AK Steel (AKS).

Index Trading
The CBOE Volatility Index (.VIX) seems to have found a new range in the low 30s. VIX, which tracks the expected volatility of S&P 500 Index options, has traded between 31.81 and 36.12 Friday. With 10 minutes left to trade, VIX is up 6.19 to 35.65. While VIX in the mid-30s might seem elevated relative to historical levels, it is not when compared to the actual volatility of the S&P 500 Index. The 20-day statistical or actual volatility of the S&P 500 is now 32.8. Since VIX tracks the implied or expected volatility of the S&P 500, it makes sense that it will be at levels consistent with the actual volatility of the index. This is true of any option. That is, its implied volatility will normally be in-line with the actual volatility of the underlying instrument.

ETF Trading
SPDR Retail Trust (XRT) lost $1.90 to $38.76 after the day’s economic news weighed on the retail sector Friday. XRT, which is an exchange-traded fund that holds shares in a diverse group of retailers, is down 15 percent from the highs seen in late April. Some investors appear to be bracing for additional weakness in the ETF, as 111,000 puts traded on the fund Friday. September 31s were the most actives and included large blocks traded at the offer price of 84 and 88 cents per contract with more than 30,000 total options trading.