Summer Camps 06-21-2010

Cusick’s Corner
The market continued to pull back into the After Hours but was able to hold key support, SPX 1110. While the Yuan news was a potentially nice boost for market sectors that we mentioned in the Midday, it only incited the Deflationary or Disinflation camps who believe that this is either a rouse by the Chinese or they just fired their last proverbial bullet before the G20 meeting. Speaking of meetings -- there is a two-day Fed meeting and the market will be watching to see if there’s any inflation and if keeping it in check is still the only storyline, plus if there’s any language that surfaces about disinflation. Existing Home sales due out at 10:00am ET -- watch to see if there is a dramatic pullback in the pool of buyers in the face of the tax credits being pulled. See you Midday.

Stocks traded broadly higher early, but then gave back the gains and the major averages finished with modest losses Monday. The table was set for gains on Wall Street after Asia’s equity markets cheered news that China was abandoning the peg between the yuan and the US dollar. The link between the two currencies was implemented two years ago during the global financial crisis and the change in policy signals greater confidence in China’s economy, as well as a more open trade policy from China. However, although the Dow Jones Industrial Average rallied as much as 140 points in morning trading, the gains were short-lived and market action had turned mixed by midday. There were no domestic earnings or economic news to guide the action and, stocks slumped into the close. After a four-day winning streak, the Dow close down 9 points on the session. The tech-heavy NASDAQ lost 20.7.

Bullish Flow
Amgen (AMGN) shares gained $1.32 to $56.52 and seemed to benefit from news that Affymax’s (AFFY) anemia drug, Hematide, resulted in greater health risks, including heart attacks. AFFY plummeted 68.8 percent on the news. Meanwhile, AMGN, which produces its own anemia drug, jumped higher and options volume hit 2.5X the average daily, with about 30,000 calls and 10,000 puts traded. The top trades included some apparent diagonal spreads, where one more investors were selling October 55 calls and buying January 62.5 calls, 5000X in morning action. The spread is possibly a bet that AMGN will hold around $55 through the October expiration, and then rally during the three months that follow.

Bullish order flow was also seen in Revlon (REV), Alcoa (AA), and Heinz (HNZ).

Bearish Flow
General Mills (GIS) shares lost 59 cents to $37.95 and put volume surged, with roughly 33,000 contracts traded on the day. The volume represents 18X normal and compares to 4,400 calls. The action was focused on July 37.5 puts, which traded 13,400X. August 35, August 37.5, and July 36 puts saw interest as well. There was no company specific news to explain the action, but implied volatility rose nearly 9 percent to 25, suggesting demand for put options was driving up options premiums in the food company Monday.

Bearish flow also picked up in Emerson Electric (EMR), AMD, and Micron Technology (MU).

Index Trading
Options action picked up in the Russell 2000 Small Cap Fund (.RUT) Monday. The index, which tracks the share price action of 2000 of the smallest US-listed companies, gave up early gains and finished the day down 6.89 to 660.03. In the options market, 135,000 puts and 54,000 calls traded on the index. The top trades were in the July 550 – 560 put options, which traded more than 42,000X each. Looks like bullish spread traders were taking positions, paying about $1.10 for the 550s and collecting $1.40 on the 560s, possibly betting that the Russell will hold above 560 through the July expiration (25 days).

ETF Trading
Select Sector Basic Materials Fund (XLB) added 19 cents to $31.14 Monday and options volume hit 8.5X the average daily, with 81,000 puts and 35,000 calls traded. The top trades were in the July 30 – 32 put spread, which was bought at 70 cents, 30000X in morning trading. That is, an investor – probably an institution – bought 30,000 of the July 32 puts at $1.10 and sold 30,000 July 30 puts at 40 cents. The spread offers a potential pay-off (excluding commissions) of $1.60 if shares of the fund fall to $30 or less by the July expiration.