Overnight Market Action 11-12-2010

Cusick's Corner
I am tired – was up last night watching the latest market action. China has been dropping on inflation fears, adding fuel to the currency debate and then the delay of the Fed open market purchase brought out all the conspiracy theorists. These are the types of headlines that could act as a catalyst for the bears, at least for the short term, but potentially allows those who missed the last 7% to the upside to potentially scale in. Watching short-term supports -- use 5-, 20-, and 35-Day Moving Averages to see if the support bids come in to play, 1192 on the 20 EMA for the Dec E-mini S&P. See you After Hours.

Major averages stumbled on concerns about events at home and overseas. Shanghai's Composite Index plummeted 5.2 percent Friday after Chinese regulators raised the possibility of rate hikes amid rising inflation. The worries sent stocks broadly lower across China and triggered a ripple effect across global equity markets. The Dow Jones Industrial Average opened lower and the decline gathered some additional momentum through midday. The only economic stat Friday showed the UofM consumer sentiment index up 69.3 in November, from 67.7 the prior month and slightly better than the 69.0 reading that economists had expected. However, the market showed little reaction to the news. Instead, the focus was on overseas action and reports the Federal Reserve has experienced a technical glitch in its first day of Treasury purchases. The Fed is expected to buy bonds as part of its QE2 monetary policy. Consequently, bonds are under pressure and yields are rising. Stocks faltered, the Dow Jones Industrial Average is off 116 points and the NASDAQ lost 42. Trading in the options market is very busy, with about 3.3 million calls and 2.6 million puts traded through 11:00 ET.

Bullish
Disney (DIS) shares are seeing relative strength on earnings news. Shares are up 4.4 percent to $37.50 and the best gainers in the Dow Jones Industrial Average after the company's earnings were leaked early before the close of trading yesterday. The initial reaction was negative, as the stock fell to $35.15 late Thursday. However, the stock had stabilized in after hours yesterday and then opened higher Friday. From there, shares have been strengthening and touched a new 52-week high. Meanwhile, trading in Disney is brisk. 46,000 calls and 38,000 puts traded in DIS so far.

A big spread traded in Nvidia (NVDA), after shares of the chipmaker moved higher on earnings news Friday. NVDA has added 71 cents to $13.32 on the session. Meanwhile, options volume is 2.5X greater than usual, with 83,000 calls and 25,000 puts traded. The top (or largest) trade is a spread, in which an investor sold 16,000 January 14 calls at 74 cents and bought 16,000 January 2012 $22.5 calls at 45 cents. This spread likely exits a position opened on September 24 when shares were 8.6 percent below current levels and the same spread was bought at 16 cents, 17,650X.

Bearish
A massive spread trades in the iShares Emerging Markets Fund (EEM) Friday. Shares are off $1.31 to $46.25 after inflation worries in China triggered an uptick in volatility in equity markets across many developing countries across Asia. EEM is down and one investor bought the November – December 45 put spread at 72 cents, 95,000X. That is, they sold a massive block of 95,000 November 45 puts at 21 cents and bought 95,000 of the December 45 puts at 93 cents. This looks like a position adjustment and a roll out of November, into December. This strategist might be looking to hedge their portfolio an additional month. November options expire at the end of next week.

Fairchild Semiconductor (FCS) is the subject of put buying Friday. Shares are flat at $12.10 and options volume is 8X the average daily, after 6,220 puts and only 52 calls traded on the chipmaker. December 11 puts are the most actives. 4,400 traded and, with 99 percent of the volume going through the asking price, it looks like put buyers are taking positions on concerns about possible upcoming weakness in FCS shares.

Unusual Volume Movers
Cisco Systems (CSCO) options volume is running 2X the usual, with 338,000 contracts traded and call volume accounting for 61 percent of the activity, according to data from website WhatsTrading.com.

Disney (DIS) options activity is running 4X the usual, with 85,000 contracts traded and call volume representing 54 percent of the volume.

Human Genome Sciences (HGSI) options volume is 3.5X the typical levels, with 78,000 contracts traded and call volume accounting for 53 percent of the activity.

Increasing volume is also being seen in Green Mountain Coffee Roasters (GMCR), Abbott Labs (ABT), and MEMC (WFR).

Implied Volatility Movers
CBOE Volatility Index (.VIX) has seized the 20 handle. The market's “fear gauge” is up 1.70 to 20.34 and near session highs amid increasing volatility in the global financial markets. VIX also seems to be responding to news that the Federal Reserve suffered a technical glitch today in its QE2 strategy. Today is the first day Fed officials were scheduled to conduct asset purchases, with $6-8 billion in Treasurys scheduled to be bought. VIX, which tracks the expected volatility priced into S&P 500 Index options, is up more than 10 percent since Wednesday.