Market Focused on Interest Rate Moves 11-16-2010

Cusick's Corner
The market stayed focused on any potential interest rate moves and their possible impact on the global economy, especially if China does raise rates. In commodities like Copper, the initial impact was in sympathy down and overall the continued stress from growth in that region, in spite of interest rate hikes, will most likely not be as great as this pullback suggests. The strength of the Dollar in the short-term can be explained by the falling Euro, but from a macro level there is a bottom being potentially set in the Buck. With the EU and China news leaving the market jittery, best to let the weak hands get washed out at this point. See you Midday.

Major averages finished sharply lower, as events overseas triggered a volatile reaction on Wall Street Tuesday. Asia's equity markets fell overnight after South Korea raised a key interest rate. Stocks fell across Shanghai and Hong Kong on worries Chinese officials will also take steps to slow mounting inflationary-pressures due to a red-hot economy. Meanwhile, in Europe, the focus is on escalating debt problems in Ireland and the ongoing European Debt Crisis. Stocks finished broadly lower across the Atlantic as well. The volatility spilled over onto US shores and a mixed round of economic news did little to ease investor anxiety levels. Data released before the bell showed the Producer Price Index [PPI] up .4 percent in October and half as much as economists had predicted. Meanwhile, separate data showed Industrial Production flat in October. Economists were looking for an increase of .2 percent. However, the latest NAHB Homebuilder Index was a bit stronger than expected, increasing to 16 in November, compared to 15 in October and ahead of economist estimates of 15. At the end of the day, the data didn't matter much. The focus is on problems overseas. The Dow Jones Industrial Average finished the day off 178 points and up 45 points from session lows. The NASDAQ gave up 44.

Bullish Flow
Interesting trading activity in Collective Brands (PSS) Tuesday. Shares of the shoe retailer finished the day up 23 cents to $15.76 after the company announced a partnership with Li & Fung to bring its product to Greater China and Southeast Asia. Meanwhile, options volume hit 16.5X the average daily, driven by January 2012 $15 put – 17.5 call bullish risk-reversals. For example, 1,000 Jan12 15 puts traded on the $2.70 bid in afternoon action while 1,000 January 17.5 calls at the $2.60 ask. This combo, at a net credit of 10 cents, seems to be a bullish play (selling puts to buy calls) in anticipation of additional gains in PSS through 2012. By selling puts, the investor is also making the statement that they're willing to buy the stock at the strike price during that time. The risk-reversal traded 4000X on the day.

Bullish options action was also seen in SuperValue (SVU), Urban Outfitters (URBN), and Nexen (NXY).

Bearish Flow
Put volume picked up in Glaxo Smithkline (GSK). The pharmaceutical maker is partner with Human Genome Sciences (HGSI) in a highly-anticipated Lupus drug, Benlysta, which is in the midst of a panel review Tuesday. HGSI shares were halted for the entire trading session Tuesday. However, GSK was trading and lost 69 cents to $38.54. Shares sank towards session lows into the closing bell, as media reports suggest that the FDA panel is expressing concerns about the safety of the treatment. Meanwhile, 5,540 puts and 2,430 calls traded in GSK, which is more than 4X the average daily volume. November 36 and 37.5 puts were the most actives, with some investors apparently taking defensive positions ahead of the FDA panel decision. A final FDA decision for Benlysta is slated for December 9.

Bearish flow also picked up in Netapp (NTAP), Banco Santander (STD), and Mylan (MYL).

Index Trading
Put volume picked up in the S&P 500 Index (.SPX) Tuesday. The index lost 19.41 points to 1,178.34 and 687,000 puts traded on the index, which is nearly double the recent average daily SPX put volume, according to Trade Alert data. Trading was brisk in December 1,200 puts, December 1,180 puts, November 1,150 puts, December 1,175 puts, and December 1,125 puts, as nervous fund managers scrambled to buy SPX puts as portfolio protection. Meanwhile, the CBOE Volatility Index (.VIX), which tracks the expected volatility priced into SPX options, jumped 2.38 points to 22.58. VIX hit a five-week high of 23.07 in midday action.

ETF Trading
IShares Brazil Fund (EWZ) options were actively traded. Shares lost $2.11 to $74.80 on a rough day for global equity markets, including those in Brazil. Meanwhile, options volume in the exchange-traded fund included 58,000 puts and 38,000 calls. March 65 puts were the most actives after one player initiated a March 74 – 65 (1X2) ratio backspread at 40 cents, 5000X. That is, they sold 5,000 March 74 puts at $6.30 and bought 10,000 March 65 puts at $2.95. The spread, for a net credit of 40 cents, is a volatility play. If EWZ holds above $74 through the March expiration, the puts expire worthless and the strategist keeps the credit. However, bigger profits are possible if EWZ falls and volatility in fund makes a dramatic move higher.