Risk Off Continues 05-23-2011

Cusick's Corner
Risk off trade continued into the After Hours and there was no real pressure on the shorts. Finance, XLF, is not a sector where we want to see any weakness if this market is going to get some potential legs to the upside. Bonds, TLT, may be on the move higher today, but I will be watching the 94 level for a break which would be a good indicator of the risk averse trade abating. Weakness, both domestically and internationally, is on the minds of all market participants and this overall big trend up may be having its real first challenge of 2011. Verticals, whether debit or credit spreads, are the strategies of choice in uncertain markets. New Home sales are tomorrow after the open and that has the potential to add some early moderate volatility, especially if there a big drop from the 300K for March. See you Midday.

Stocks moved broadly lower and were weighed down by worries that the European Debt Crisis is deepening Monday. Before the opening bell on Wall Street, Italy's FTSE MIB Index was pacing a decline across the Euro-zone, falling more than three percent, after Standard and Poor's lowered its credit rating on Italy to negative from stable. With no economic data to guide US trading, the volatility from overseas spilled over onto US shores and stocks fell sharply at the open. Despite a modest rebound attempt through midday, stock market averages stayed in red throughout the trading session. Meanwhile, crude oil lost $2.67 to $97.43, but flight-to-safety gave gold a modest bid. The yellow metal traded up $8.30 to $1,517.20 an ounce. The dollar index rose .9 percent to 76.13, but stocks fell. At the closing bell, the Dow Jones Industrial Average was down 131 points and the tech-heavy NASDAQ had lost 44.4.

Bullish
Barnes and Noble (BKS), which surged nearly 30 percent Friday after John Malone's Liberty Media made a $1 billion bid for the book store chain, saw active trading today. Shares added another 26 cents to $18.59 and are now trading well above the proposed $17 per share takeover price. In BKS options action, 11,000 calls and 3,760 puts traded on the day. January 20 calls, which are now 7.6 percent out-of-the-money, were the most actives. More than 5,000 traded against existing open interest of 542 contracts. The top trades were blocks traded at the 85-cent asking price. John Malone talked about the deal today, saying that Google's Android operating system, which powers Barnes and Noble's Nook electronic book-reading device, could dominate the market in the years ahead. The fact that BKS shares are trading above the takeover offer price and that some investors are taking positions in OTM calls on BKS, might reflect the sense that Barnes & Noble will ask for a higher offer and/or that another bidder might emerge before the deal gets done.

Bullish trading was also seen in Krispy Kreme (KKD), International Game Technologies (IGT) and Corinthian Colleges (COCO).

Bearish
Career Education (CECO) shares lost 87 cents to $21.13 and have now suffered a seven-day 9.6 percent skid. There's been no recent news in the for-profit education company, but the slide seems to have stirred up some bearish sentiment in CECO options. 5,900 puts and 700 calls traded in the name today. July 21 puts, which are now nearly at-the-money, were the most actives. 3,223 traded and, with 96 percent trading at the ask, it looks like buyers were driving the action. June 19 and 21 puts saw interest as well. Implied volatility jumped 13 percent to 48, as investors appear to be bracing for additional short-term volatility in Career Education shares.

Bearish flow also surfaced in MIPS Technologies (MIPS), Norfolk Southern (NSC), and Focus Media (FMCN).

Index Trading
CBOE Volatility Index (.VIX) hit a morning high of 20.03, but gave back a good portion of the early gains and finished the day up .84 to 18.27. There was not much volume either. 170,000 calls and 63,000 puts traded on the market's "fear gauge." June 27.5 calls and June 15 puts, which are now the front-month options because May contracts expired next week, were the most actives. Meanwhile, 512,000 calls and 734,000 puts traded across all index products. The S&P 500 Index (.SPX) lost 15.90 to 1,317.37 and the three most active index contracts were out-of-the-money puts on the S&P 500 - June 1225, 1250, and 1300s - as some investors bought OTM SPX puts for some downside portfolio protection Monday.

ETF Action
Powershares Bullish Dollar Fund (UUP) saw increasing call volume today. Shares, which track the performance of the dollar against the euro, yen, and other major foreign currencies, finished the day up 14 cents to $21.79 and have now added 4 percent since March 4. The dollar has been rising against other currencies, especially the euro, due to problems in the Eurozone. In UUP options action, 38,000 calls and 31,000 puts traded in the exchange-traded fund. June 22 puts, which are now 1 percent out-of-the-money and expire in 25 days, were the most actives. 13,000 traded. September 22 calls were busy as well, as some investors were apparently taking positions in these OTM calls on hopes the rally in the dollar can continue in the weeks/months ahead.