Market Squeeze 09-12-2011

Cusick's Corner
The market has rallied, it's more of a squeeze, but this is not a signal of a total move from risk aversion to risk on. The reality is things look cruddy; yes, I used a sixth grade word to describe the state of the financial markets, so the flight to cash at this stage is not surprising. The offensive sectors, XLI, XLF, XLK, QQQ, and XLY are underperforming and the Small Caps, like RUT and IWM (those higher beta stocks), are still in a defined trend down. Until I see the any conviction and out performance in 3 out of the 4 of these sectors, I think this market will be staying in this wide range, 1100-1200 on the S&P 500. I will be watching the early morning markets to see what if any action is taken in the EU. See you Midday.

Stock market averages traded lower throughout most of the session, but then shot higher in the final hour to finish with gains Monday. The table was set for morning weakness on Wall Street after France's CAC 40 Index was hammered for a 4 percent loss on concern Moody's might soon downgrade French banks. A lack of solutions to help Greece also weighed on Eurozone equity markets. Germany's DAX lost 2.3 percent and Spain's IBEX gave up another 3.4 percent. Although the tech-heavy NASDAQ did manage modest early gains in the US after Broadcom (BRCM) made a bid for chipmaker NetLogic (NETL), the gains didn't hold. Both Dow and the NASDAQ were in the red through midday. Trading remained sluggish until the final hour. Then, the euro rallied on reports Italy is in talks to get financial support from China. The news also helped lift stock market averages and, at the end of the day, the Dow was up 69 points. The tech-heavy NASDAQ gained 27.1.

Bullish
DELL gained 22 cents to $14.19 and an interesting three-way spread trades on the computer maker Monday. In this strategy, the investor apparently sold 8,360 October 12 puts on DELL at 27 cents per contract, bought 8,360 October 14 calls at 83 cents and sold 8,360 October 16 calls at 17 cents. In other words, Oct 12 puts were sold at 27 cents to help finance an Oct 14 - 16 call spread at 66 cents. 39 cents was paid for the three-way and the position looks opening because volume exceeds open interest in all three contracts. The spread is bullish, as it makes its best profits if DELL rallies to $16 or more through the October expiration, which represents a 12.8 percent jump over the next 39 days. If instead the stock falls below $12 and the position is held to the expiration, the strategist will face assignment and be asked to buy the stock at that price. DELL shares lost 10.1 percent on 8/17 after earnings were reported, but have been trading in a range since that time. Today's spread trader is possibly taking the position on expectations for a rebound through mid-October.
Bullish trading was also seen in General Growth Propoerties (GGP), Brocade (BRCD), and Swift Transportation (SWFT).

Bearish
A number of food companies saw bearish trading Monday. Conagra (CAG) was one of them. Shares battled back from early weakness and added a nickel to $23.85 on the day. Options players were focused on January 22.5 puts. The top trade was a 2,700-contract block at $1.19 per contract when the market was $1.10 to $1.20. At the end of the day, more than 5,000 CAG Jan 22.5 puts had changed hands. The contract is 5.7 percent out-of-the-money and some investors might be buying these puts on concerns the stock will fall below that price level through January 2012. It's possibly part of a sector play, as a number of other food companies saw bearish flow today as well (see below).

Bearish trading was also seen in Kraft Foods (KFT), General Mills (GIS), and Chiquita Brands (CQB).

Index Trading
CBOE Volatility Index (.VIX) saw heavy trading Monday. The market's "fear gauge" climbed higher throughout morning trading on European debt fears and worries about a potential Greek default. VIX rallied to an afternoon high of 43.18 and then imploded in the final hour and a half of trading. At the end of the day, the index was up .07 to 38.59, but 10.6 percent off session highs. Options action in the VIX pits was brisk today as well. 320,000 calls and 165,000 calls traded on the volatility index. September 35 puts, September 45 calls, and September 50 calls were the most actives. Players were taking positions in short-term VIX options and bracing for the next big change in market volatility. VIX options expire on Wednesday and the last day to trade is on a Tuesday. During some months, it is the Tuesday before the standard expiration. This month, it is the Tuesday after the "quadruple witch" expiration and so VIX September 2011 contracts expire in 8 days.

ETF Action
PowerShares Bullish Dollar Fund (UUP) saw brisk trading Monday. UUP is an exchange-traded that tracks the price action of the dollar against a basket of foreign currencies and it is heavily weighted towards the euro and yen. UUP hit a morning high of $22.05 and its best since March following another day of losses for the European currency. However, a late-day rally in the euro sent UUP off session highs and shares finished up just a penny to $21.92. In options action, 85,000 calls and 15,000 puts traded on the dollar fund today. September 22 calls and October 23 calls were the most actives, as some players were likely taking positions in out-of-the-money call options on the view dollar strength, euro weakness, will continue in the days/weeks ahead.