Consumer Now in Question 05-16-2011

Cusick's Corner
Breach! Pressure mounts in Washington as the debt ceiling was breached (bad for the postal pension holders), sending the bond markets to their best levels. Government pension holders will be the backstop at least through the summer. In the commodity world, the floods along the Mississippi have threatened cotton and wheat crops which have sent both markets to the upside. Retail and Tech are the hardest hit sectors, especially with the consumer now in question. This will raise too many short-term flags to mention in this Corner, but will leave pause to think how best to economically hedge if storm clouds are on the forefront. We have talked about this is detail before but index puts or puts spreads are a potential solution. While the technical integrity of the market is intact, the macro economic issues are mounting the pressure. See you Midday.

Stock market averages suffered losses on disappointing earnings and economic news Monday. Trading was sluggish early after data released before the opening bell showed the NY Empire State Index at 11.9 in May, which was down from 21.7 the month before. Economists were expecting the gauge of regional manufacturing activity to dip to 18. Meanwhile, the NAHB Homebuilder Sentiment Index remained unchanged at a depressed level of 16 this month, which was in-line with economist estimates. Renewed weakness in crude and gold seemed to weigh on some of the commodity-related names as well. Crude shed $2.65 to $97 per barrel and gold gave back early gains to close down $3.30 to $1,490.30. At the same time, Lowe's (LOW) and JC Penney (JCP) both finished with losses of more than 3 percent on disappointing earnings news. Dow components Home Depot (HD) and Walmart (WMT) release results tomorrow morning. The Dow Jones Industrial Average finished with a 48-point loss ahead of the results. The tech-heavy NASDAQ suffered a 46-point drop.

Bullish
IMAX shares touched a new 52-week high Monday morning after the company announced an agreement with Cineplex. Under the terms, Cineplex will buy three new IMAX systems and also upgrade seven of its existing IMAX film-making projectors to digital systems. However, the gains didn't last, as shares of IMAX finished the day down 84 cents to $35.82. Still, the overall options volume seemed somewhat bullish because 7,700 puts and 320 calls traded in the name today. May 37 call options, which are 3.2 percent out-of-the-money and expire at the end of the week, were the most actives. 2,660 traded. May 38 and June 40 calls were busy as well. Some investors might be looking for the stock to extend recent gains heading into a presentation tomorrow at a JP Morgan Technology, Media and Telecomm conference. Shares have already performed well in recent months. IMAX has almost tripled in value since hitting a 52-week low of $12.1in July of last year.

Bullish trading was also seen in Micron Technology (MU), Acorda Therapeutics (ACOR), and American Axle (AXL).

Bearish
KongZhong (KONG) was down and put volume picked up Monday. Shares of the Beijing, China multimedia and graphics software company finished the day down $2.12 to $5.48 in volatile trading. It's not clear what triggered the big move, as there were no obvious headlines on the stock. Meanwhile, options volume hit 17X the average daily. 5,640 puts and 950 call options traded in the name. June 5 puts, which are now 8.8 percent out-of-the-money, were the most actives. 3,820 traded. Another 1,275 May 5 puts changed hands. Some investors appeared to be taking positions on concerns about additional downside in KONG shares heading into a May 24 earnings release.

Bearish flow also surfaced in Dell Computer (DELL), USEC (USU), and Public Enterprise Group (PEG).

Index Trading
CBOE Volatility Index (.VIX) edged higher in the second half of trading. VIX, which tracks the expected volatility priced into S&P 500 Index (.SPX), was little changed at midday, but then rallied after stock market averages faltered in the final hour. The S&P 500 finished the day down 8.30 to 1,329.47 and VIX rallied 1.17 points to 18.24. In the VIX options pits, 301,000 calls and 152,000 puts traded on the session. The top trade of the day was part of a spread, in which the investor apparently bought 10,000 June 22.5 calls at $1.97 and sold 20,000 July 30 calls at 96 cents. They paid a nickel for this 1X2 call ratio spread and might be looking for VIX to move back towards 30 through the July expiration.

ETF Action
Put volume picked up in the SPDR Retail Trust (XRT) on disappointing earnings from Lowe's (LOW) and JC Penney and ahead of earnings from Walmart (WMT) and Home Depot (HD), which are due out tomorrow morning. XRT, which is an exchange-traded fund that holds more than 90 different retail names, finished the day down 1.7 percent to $53.21. Meanwhile, the top options trade in the retail ETF was a block of 15,000 December 44 puts that traded at $1.27 per contract on the International Securities Exchange. It was an opening buyer, according to sentiment data from the exchange. Volume in the contract, which is 17.3 percent out-of-the-money, reached 15,600. A total of 38,000 puts and 3,925 calls traded in all.