Slip and Slide 06-29-2010

Cusick’s Corner
The market continued to slide, wiping out this impressive rally that we have had since February. The sectors that have led this performance have been Consumer Discretionary and Financials. With consumer spending making up 2/3 of the GDP, any pullback in this segment is going to derail the near-term correction. Over the next week I will be reviewing the impact on Q3 & Q4 earnings estimates. At this stage, the GDP growth in theory looks to still be on target of 2.5% in the second half of next year. However, that Consumer Confidence number is a potentially yellow light on employment and income and we will need to see if that does actually translate into less spending. Watch 1031 on the S&P 500 to hold and for a break above 1050 to garner momentum to the upside. See you Midday.

Stocks finished broadly lower following a day of heavy selling in overseas markets and disappointing economic data Tuesday. The stage was set for morning losses on Wall Street after markets across Europe and Asia fell on disappointing economic data out of China. The Shanghai Composite Index fell more than 4 percent. Losses were suffered across Europe as well, with a 4 percent loss in France’s CAC 40 Index helping to pace the decline. Meanwhile, the domestic news didn’t help much after the latest Consumer Confidence report showed a drop to 52.9 in June, down from 62.7 in May and significantly worse than the 62 reading that economists had expected. At the end of the day, the news didn’t offer much fodder for the bulls and the Dow Jones Industrial Average tumbled 269 points. The tech-heavy NASDAQ lost 85.5.

Bullish Flow
VALE, the Brazilian steel and iron company, took a hit amid increasing worries about the global economic outlook. Shares finished down $1.72 to $24.91. In the options market, one contrarian minded investor appears to have initiated a bullish “risk-reversal” in the August 23 puts and August 27 calls, at a 24 cent net credit, 10000X. That is, they sold 10,000 August 23 puts at $1.14 and bought 10,000 August 27 calls at 90 cents. This strategist might be looking for shares to hold May lows around $23.50 and bounce higher, beyond the $27 strike price. They’re also making a pledge to buy the stock at $23 if it falls below that level before the August expiration.

Bullish order flow was also seen in Electronic Arts (ERTS), MicroStrategy (MSTR), and US Airways (LCC).

Bearish Flow
Royal Caribbean (RCL), which had already suffered a 14.3 percent 5-day drop prior to Tuesday, lost another $2.25 to $23.06. Options action picked up as well, with 51,000 puts and 3,840 calls traded on the cruise ship operator. The top trades appear to be a position adjustment, where a strategist sold 12,500 September 32 puts at $9.10 and bought 25,000 September 21 puts at $1.95. That is, they probably exited a profitable position in September 32 puts and then bought another position, twice as big, in the September 21 puts.

Bearish flow also picked up in Intrepid Potash (IPI), Steel Dynamics (STLD), and Avon Products (AVP).

Index Trading
The CBOE Volatility Index (.VIX) saw a spike amid increasing action in the index market Tuesday. The market’s “fear gauge” rallied 5.13 points to 34.13. Meanwhile, total index volume increased as well, with 560,000 calls and 698,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is more than 2X the volume seen the day before. Nervous investors scrambled to buy SPX puts to protect portfolios. Consequently, since VIX tracks the expected volatility priced into S&P 500 Index options, the surge in interest in the contract helped send VIX to three-week highs.

ETF Trading
A number of leveraged ETFs saw increasing volume, as options players jockeyed for position for the market’s next move. For example, the Proshares UltraShort S&P 500 Fund (SDS) jumped $2.11 to $36.88 and options volume hit 3X the average daily, with 108,000 calls and 28,000 puts traded on the ETF. Meanwhile, the Proshares Ultra S&P 500 (SSO), which lost $2.13 to $32.96, also saw 3X the normal options volume with 26,000 calls and 27,000 puts traded on the day. While SDS is designed to move 2X the opposite to the daily performance of the S&P 500, the SSO is designed to move 2X in the same direction.