Negative Reaction to Fed Announcement 12-14-2010

Cusick's Corner
The market finished the day unchanged after a negative reaction to the Fed announcement. For technicians and market watchers, the current picture looks a little toppy and the expectation that this positive trend will continue is getting a little extreme. There has not been that “aha” moment weighing in on this bullish sentiment to really start to tip the scales. Small Caps, IWM, did not bounce back and this was a little concerning since these higher beta stocks need to be the leaders if the upside trend wants to continue. Tomorrow will be another busy day on the data front, starting with the CPI at 8:30am ET and then followed by the Crude Inventories at 10:30am ET. If the data continues to show lack of price, this could signal a continued tough employment picture, but the Fed did confirm that they are committed to fighting these deflationary pressures. Let's see what the data tells us tomorrow. See you Midday

The table was set for morning gains on Wall Street after the Commerce Department reported that retail sales rose for a fifth consecutive month, increasing by .8 percent in November. Economists were looking for an increase of just .5 percent. Separate data showed the November Producer Price Index [PPI], a gauge of inflation at the wholesale level, up .8 percent and also .3 percent more than expected. Meanwhile, some of the focus is on Washington where policy makers are discussing tax plans. However, while optimism for tax cuts and stronger-than-expected data helped the equity market early, it was taking a toll on bonds. The benchmark ten-year Treasury note fell in morning action and was also weighed down by a warning from Moody's. The credit rating firm warned that it might cut the US Aaa rating if Obama tax plans becomes law. The selling in bonds gathered additional momentum after the Federal Reserve Open Market Committee [FOMC] released its post-meeting statement. As expected, Fed officials left rates alone and reiterated their plans to buy back up to $600 billion in Treasuries. Still, bonds fell on the news and the yield on the ten-year Treasury is at its best levels since June – to 3.47 percent from less than 3 percent last Monday. Higher yields seem to be keeping the equity market in check. The Dow Jones Industrial Average finished up 48 points and 36 points from session highs. The NASDAQ added 2.8.

Bullish Flow
Colgate Palmolive (CL) saw relative strength and increasing options volume Tuesday. Shares added $1.43 to $80.78 and the day's options action included 11,000 calls and 4,000 puts. The top trade of the day was a spread, in which the strategist apparently bought 800 May 85 calls at $1.71 and sold 800 Jan 85 calls at 34 cents. The spread, for a net debit of $1.37, is possibly rolling of January calls to May calls, and or it might be a time spread. The time spread would work well if shares hold below $85 through the January expiration and then move higher through May.

Bullish order flow was also seen in AIG, Whirlpool (WHR), and Seagate Technology (STX).

Bearish Flow
Skyworks Solutions (SWKS), a Woburn, MA semiconductor company, lost 20 cents to $26.89 and the day's options order flow included 7,300 puts and 1,220 calls. February 24 and February 25 puts were the most actives, with 1,487 and 2,076 contracts traded, respectively. In addition, about 95 percent of the volume traded at the asking price, which reflect increasing buying interest. January 27 and 28 puts were busy as well and trading predominantly on the bid. So, some investors might have been selling to close out positions in the January 27 and 28 puts, which are in-the-money, and buying-to-open new positions in the out-of-the-money February 24 and 25 puts.

Bearish flow also picked up in CSX, Tyson Foods (TSN), and Intermune (ITMN).

Index Trading
CBOE Volatility Index (.VIX) call options were busy Tuesday. The volatility index hit a low of 17.22, but moved higher into the FOMC statement and held the gains into the close. VIX added .06 to 17.61 on the session. 274,000 calls and 51,000 puts traded on the index. January and February calls with strike prices ranging from 20 to 37.5 were the most actives, as some nervous investors scrambled to buy out-of-the-money VIX calls on fear of increasing volatility. The top trade of the day, however, was a block of 10,372 Jan 35 calls on the 25-cent bid and possibly an investor liquidating a position after the Fed's FOMC statement had passed.
ETF Trading

Options on the iShares Long-Term Bond Fund (TLT) and the Proshares Ultrashort Long-term Bond Fund (TBT) were busy today. TLT, which holds a basket of government bonds the mature in 20+ years, lost $1.36 to $92.14 and one investor sold 25000 December 94 puts at $2.03 per contract. It might be a closing trade, as the contract is almost $2 in-the-money and expires at the end of the week. Meanwhile, TBT, which moves twice the opposite of TLT, rallied $1.05 to $39.11 and options volume surged to 3X the average daily. 113,000 calls and 91,000 puts traded, as some investors were jockeying for position in TBT puts and calls as a way to play the recent increase in volatility in bonds.