Bond Market Starting to Show Nervousness

Cusick's Corner
The market bounced back into the close, well off its worst levels. But as I mentioned in the midday, the Bond market, TLT, is starting to show nervousness about future inflation and the continued flooding of capital on the fed long-term. What that means for equities is that money that is flowing out of the long end of the curve is going to make its way into the equity and commodity markets. So the weak Dollar, the struggling long end of the yield curve and the continued worldwide stimulus leaves the upside wide open. Now tomorrow we do have data which could add further volatility, starting with CPI and Retail sales at 8:30am ET, followed by Michigan Sentiment at 10:00am ET. Don't forget that we have AM settlement for the European options and tomorrow is the last day that American style options (options on equities, ETFs and a few indices) cease to trade at the close of business. See you Midday.

The table was set for losses on Wall Street Thursday morning following a round of uninspiring economic news. Before the stock exchanges opened in New York, the Labor Department reported that filings for jobless benefits increased by 13,000 to 462,000 in the week ended October 9. Economists were looking for a smaller increase of 1,000. Separate data showed the Producer Price Index [PPI] up .4 percent in September, and twice hotter than expected. A third piece of economic news showed the overall Trade Balance widening to $46.3 billion in August, which was up from $42.6 billion in August and wider than the $44.5 billion deficit that economists had predicted. The Dow Jones Industrial Average fell into midday, with notable weakness seen in financial names BofA (BAC) and JP Morgan (JPM). However, a modest round of buying interest surfaced late and the Dow finished with a modest 1-point loss, up 71 points from session lows. Market action might remain volatile tomorrow due to the options expiration and a busy economic calendar, which includes retail sales, manufacturing and consumer confidence numbers.

Bullish Flow
Ford Motor (F) calls were active Thursday. Shares bucked the bearish trend and finished the day up .27 to 13.91. Meanwhile, options volume rose to 2X the average daily. 131,000 calls and 70,000 puts traded on the automaker. One noteworthy spread traded in morning action when one investor apparently sold 33,000 November 14 calls at 58 cents per contract and bought 32,500 November 15 calls at 22 cents. The spread might roll up in strikes. That is, the investor is possibly closing out a position opened in the November 14 calls a few days ago when 32,000 traded at 56 cents. They're now opening a new position in the November 15 calls at 22 cents.

Bullish options action was also seen in Halliburton (HAL), Garmin (GRMN), and Monster Worldwide (MWW).

Bearish Flow
Banco Santander (STD) shares added two pennies to $13.18 and options volume rose to 3X the average daily. About 11,000 puts and 600 calls traded on the Spanish bank Thursday. The top trade of the day was a buyer of 5,000 November 14 puts at $1.25 per contract. At the end of the day, 9,529 contracts had changed hands. Existing open interest in the Nov 14 put is zero contracts. So, today's put buyers seem to be opening new positions and bracing for a possible loss in STD's share price between now and November expiration, which is five weeks from tomorrow.

Bearish flow also picked up in H&R Block (HRB), Bank of New York Mellon (BK), and Skyworks Solutions (SWKS).

Index Trading
Trading was very active in the index market due to the expiration. Since the settlement values of many indexes are computed using Friday morning prices, the last day to trade the products is on Thursday and therefore volume is often heavy on the Thursday before the expiration. Today, for example, 900,000 puts and 745,000 calls traded across the S&P 500 Index (.SPX) and other cash indexes. The S&P 500 finished the day off 4.29 to 1,173.81 and the SPX October 1,150 puts and calls were the days most actives. The December 1,150 puts and calls were the next most actives. Some investors were likely rolling out of the October options before they expire, and then opening new positions in December puts and calls, which expire in two months.

ETF Trading
Trading remains brisk in the PowerShares Bullish Dollar Fund (UUP). This exchange-traded fund tracks the performance of the buck against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc and will increase in value when the dollar rallies against the other majors. Shares finished down 15 cents to $22.21 Thursday and options volume hit 3.5X the average daily, with about 59,000 calls and 5,070 puts traded on the day. The January 24 calls were the most actives. 30,800 traded and 98 percent traded at the asking price, according to data from WhatsTrading.com. So, it looks like buyers were dominating the action and looking for the dollar to rally in the months ahead. The January 24 call is 8.05 percent out-of-the-money.