Market Lacks Conviction 10-04-2010

Cusick's Corner
The market continues to exhibit emotion on both sides, up and down, but there is absolutely no conviction. The VIX 23.53 +1.03 is on the move to the upside but still in that moderate range, which from a strategic perspective, means that a lot of traders are sitting on their proverbial hands. Mosaic (MOS) missed by (.05) @ .67, and with the talk of revisions on the S&P earnings down to .95, this might be a precursor to some company and analyst revisions of forward expectations. See you Midday.

Major averages finished with losses Monday. American Express (AXP) led the Dow Jones Industrial Average lower on news the Department of Justice is suing the company for anti-trust violations. Microsoft (MSFT) also weighed down the Dow after Goldman cut the stock to Neutral from Buy. The day's economic news was mixed. A report on Factory Orders released Monday morning showed a decline of -.5 percent for August, which was a bit worse than the -.4 percent that economists had expected. However, a separate report showed Pending Home Sales up 4.3 percent in August and much better than the 1 percent that economists had expected. Yet, the better-than-expected home sales data failed to motivate buyers and, instead, the Dow Jones Industrial Average was down triple digits midday. The Dow found some modest late-day strength to close off 79 points. The NASDAQ lost 26.

Bullish Flow
Casino names saw relative strength and increasing options action after a report showed casino revenues in the Macau region increasing by nearly 40 percent in September. For example, Melco Crown Entertainment (MPEL) shares gained 30 cents to $5.39 and options volume hit 3X the recent average daily. 6,870 calls and 915 puts traded on the Hong Kong-based casino operator. October 5 call options were the most actives. 3,900 options traded and with about two-thirds trading at the asking price, looks like call buyers were dominating the action and betting on further gains for MPEL.
Bullish options action was also seen in Las Vegas Sands (LVS), Wynn Resorts (WYNN), and Penn National Gaming (PENN).

Bearish Flow
American Express (AXP) shares lost $2.73 to $39.05 and options volume hit 6X the average daily after MasterCard and Visa settled antitrust allegations with the US government, but AMEX said it has no intention on settling with the Department of Justice. Shares sank in volatile trading and options volume included 66,000 puts and 40,000 calls. October 38, 39 and 40 puts were the most actives, as players scrambled for some downside protection as shares fell Monday. Implied volatility in AXP options saw a spike of about 15 percent to 40.

Bearish flow also picked up in Safeway (SWY), National Semi (NSM), and Blue Coat Systems (BCSI).

Index Trading
Call volume picked up in the CBOE Volatility Index (.VIX) Monday. The market's “fear gauge” added 1.03 to 23.53 on a volatile day for the US equity market. Meanwhile, 153,000 VIX calls and 28,000 VIX puts traded on the session. November 37.5 calls were the most actives. More than 20,000 contracts traded and most of the volume was due to ratio spreads. For example, one strategist created a ratio spread by purchasing 5,000 of the November 32.5 calls and selling 10,000 November 37.5 calls, paying a net debit of 85 cents per 1X2. This spread is a bullish bet on the VIX, as it makes its best profits if the index rallies to 37.5 by the November expiration.

ETF Trading
IShares Emerging Markets Fund (EEM) lost 14 cents to $45.29 and 95,000 puts traded on the exchange-traded fund, which is more than 3X the day's call volume. The top trade was a block of 23.220 January 45 puts at $2.76 on CBOE. A little bit later, a block of 15,000 January 45 puts traded at $2.76 on ISE. Sentiment data from the International Securities Exchange [ISE] indicate that the position was an opening buyer. At the end of the day, 43,889 contracts had traded hands and these put buyers are likely taking positions to hedge portfolios should today's volatility in the US markets spill over into the emerging markets.