Bears/Bulls Waiting to See Who Blinks First 08-11-2010

Cusick’s Corner
It looks like the market is starting to fear the Fed’s two main concerns -- weak recovery and potential deflation. So the Fed jumped in and told everyone that they are now magically pulling out money to buy Treasurys, infusing capital into the system while hopefully holding off deflation. But we need to see if this is that last of the Fed’s QE, quantitative easing, way to keep money flowing and available to help stimulate the economic turnaround. At this stage, the market is in a Midday shoot-out, with the bulls and bears waiting to see who blinks first so that the other might grab control. See you After Hours.

Stocks are broadly lower on disappointing economic data Wednesday. Stock index futures fell overnight following a round of disappointing economic news in China and Japan. In the US, the focus turned to June Trade Deficit numbers. The report, released one hour before the start of trading in New York, showed the nation’s deficit increasing to $49.9 billion, which was significantly worse than the $42.2 billion that economists had expected. With little other news to guide the action, concerns about possible deceleration in the global economy are once again weighing on investor sentiment. Crude oil is down $1.77 to $78.48, but flight to safety has gold up $7 to $1203.80. The Dow Jones Industrial Average is off more than 200 points. Options action has become more defensive, with about 3.2 million calls and 3.2 million puts traded through 11:15 ET.

Bullish
Large blocks of calls traded in Pfizer (PFE) Wednesday morning. Shares are down 42 cents to $16.15 and the action included 25,000 September 16 calls, 25,000 September 17 calls, 25,000 August 16 calls, and 25,000 December 17 calls. While the action seems like some sort of spread, all of these blocks traded on the International Securities Exchange [ISE] and ISEE sentiment data indicate that all 100,000 contracts are opening customer buyers. The bullish trading comes after a 13.6 percent rally in PFE shares since July 23. This investor might view today’s weakness as an opportunity for bullish trades in an otherwise bullish trend.

Nokia (NOK) calls are seeing some action. Shares of the Finnish phone maker lost 49 cents to $9.06 and some players appear to view the weakness as an opportunity for bullish trades in the October 10 calls. 6,390 contracts traded so far, including a block of nearly 2,000 at the 25-cent asking price. Shares have been trending higher since the company reported earnings on July 23. In addition, the Wall Street Journal reported on July 30 that some private equity firms have expressed interest in Nokia Siemens Networks.

Bearish
CREE shares are reeling and options action is brisk after the company posted better-than-expected fourth quarter earnings, but offered mixed guidance for the first quarter. CREE is off $8.96 to $60 per share on the news and options volume is running 4X the average daily, with 27,000 calls and 18,000 puts traded so far. While some investors are liquidating positions, not all of the order flow is bearish. In fact, August 65 calls have traded 7,900X and are today’s most active CREE options. Some players bought these calls early, perhaps betting today’s plunge in the stock price is an overreaction.

Large blocks of options traded on the iShares Japan Fund (EWJ), as shares fell on disappointing Japanese machinery orders data Wednesday. EWJ is off 35 cents to $9.46 and the focus is on the January 9 put – 11 call risk-reversal, as one investor paid 10 cents to buy puts and sell calls, 20000X. This massive trade was actually tied to 1.77 million shares of the Japan fund and therefore not a straight bearish bet, but rather a volatility play on the ETF.

Unusual Volume Movers
DirectTV (DTV) options volume is running 7X the usual, with 53,000 contracts traded and call volume accounting for about 50 percent of the activity.

Tellabs (TLAB) options activity is running 2.5X the usual, with 30,000 contracts traded and call volume representing 94 percent of the volume.
Broadcom (BRCM) options volume is running 2X the usual, with 25,000 traded and put volume representing 65 percent of the activity.

Unusual volume is also being seen in Macy’s (M), LDK Solar (LDK), and American Tower (AMT).

Implied Volatility Movers
The CBOE Volatility Index (.VIX) is higher, up 3.63 to 26 and its best levels so far in August. VIX had been relatively quiet in the early days of August, as volume was light and trading slowed. However, stocks sold off sharply Wednesday morning and fears about the economic outlook triggered defensive trading in the options market. For example, across the exchange-traded funds, 1.6 million puts have already traded. Meanwhile, VIX, which tracks the expected volatility of S&P 500 Index options, is at its highest levels since July 30.