China Fighting Inflation 11-11-2010

Cusick's Corner
I did say that we should be ready for a consolidated market and we certainly have it going into the last trading day of the week. The NASDAQ was very busy as tech bellwether, Cisco, CSCO, was down hard under heavy trading. But we did see some key commodity markets, like Copper, JJC, and Silver, SLV, move to the upside with all the talk of the Chinese fighting off inflation. This could be signaling a strong Chinese economy and the continuation of China's infrastructure buildup. Watch the Michigan Sentiment due out right around 10am ET which might give us a better picture of consumer psychology, especially post these elections and earnings. See you Midday.

With the bond market and government offices closed in observance of Veteran's Day, the focus Thursday turned to disappointing Cisco (CSCO) earnings and another day of losses for the euro. Equity markets in Europe and the European currency remain in the spotlight amid ongoing worries about the European debt situations. The euro, which dipped below 1.37 for the first time in three weeks yesterday, made a move below 1.36 below the buck Thursday. Meanwhile, Cisco is under pressure after the networking giant reported better than expected first quarter earnings, but guided estimates lower for the second quarter. CSCO is down 16 percent and the biggest loser in the Dow. Twenty Dow stocks are lower, ten are higher and the Industrial closed down 73, the NASDAQ lost 23 and the S&P finished down 7.5.

Bullish Flow
Discover Financial Services (DFS) is seeing relative strength and increasing options activity Thursday. Shares touched a new 52-week high and are up 30 cents to $19.02. Meanwhile, options volume is 10X the average daily. 19,000 calls and 655 puts have traded on the credit card company so far. November 19 calls are the most actives, with 9,900 traded and about 73 percent trading at the asking price, suggesting that buyers are dominating the action. December 19, December 20 calls, and November 20 calls are seeing interest as well. The increased options action is apparently being driven by takeover speculation. It's unsubstantiated chatter, but there is talk that CITIC, a Chinese bank, is eyeing DFS.

Bullish options action was also seen in MGM, Amgen (AMGN), and Ingersoll Rand (IR).

Bearish Flow
A massive butterfly spread traded in the Bank of America (BAC) Thursday. Shares are off 19 cents to $12.83 and one investor sold 65,000 January 16 calls, bought 130,000 January 17.5 calls, and sold 65,000 January 19 calls, according to a source on the exchange floor. They collected an average of less than a penny per fly for this (1X2X1) spread and are likely exiting a losing position opened on September 21. They are opting to exit the position rather than run the risk of letting it expire worthless. It is deep out-of-the-money and now has little value. While this move will incur substantial transaction costs, exiting the position will also free up margin for this massive butterfly spread trader.

Bearish flow also picked up in RINO International (RINO), Health Management Associates (HMA), and Dick's Sporting Goods (DKS).

Index Trading
The CBOE Volatility Index (.VIX) adds .38 to 18.85 and is not far from session lows in early afternoon trading. The volatility index hit a morning high of 19.75, but has drifted to a low of 18.82. Meanwhile, trading in the VIX pits is relatively uneventful so far. However, one noteworthy trade is a December 37.5 – February 35 call spread, apparently bought at $1.10, 8500X. That is, it looks like the strategist sold 8500 December 37.5 calls at 30 cents and bought 8500 February 35 calls at $1.40. This might be a position adjustment or a roll out of December and into February. On the other hand, this might be an opening diagonal spread and a bet that VIX will stay low through December expiration and then spike in early 2011.

ETF Trading
SPDR S&P Oil and Gas Exploration and Production ETF (XOP) is an exchange traded fund that holds shares in companies like Exxon (XOM), Chevron (CVX), and Conoco (COP). It is up 8 cents to $48.60 amid relative strength in the major oil names after crude gained a few pennies to $87.85 a barrel. Meanwhile, a noteworthy options action in the XOP is a morning buyer of December 47 puts at $1.03 per contract on the AMEX. They bought 15,000 total, according to a source on the floor, and might be looking to hedge a position in shares of major oil companies.