Final Countdown... 07-25-2011

Cusick's Corner
Just like the infamous lyrics from the rock band Europe, "we are in the Final Countdown" and we have republicans and democrats making loop de loops while the Fed prepares to miss a payment, and at whose expense? Ours? Washington has one shot to get this right before they form a ripple that could derail any confidence in recovery that we have at this stage. The downside, from a probability perspective, of at least being below the levels that I mentioned in the Midday of 1310 is less than 30% probability below. The one redeeming market is Tech, QQQ, which has been the market leader and has buoyed the market so far, but Small Caps, IWM, Finance, XLF, and Industrials, XLI, are all lagging -- not a good short-term barometer for the upside. Watch the markets tonight; the President will be addressing the nation on the debt talk negotiations. See you then.

Stock market averages finished with losses on a day of cautious trading Monday. The table was set for morning weakness on Wall Street after politicians failed to make progress on the budget impasse over the weekend. The August 2 deadline to raise the debt ceiling is fast-approaching and there are growing concerns about the potential economic risks if the US defaults on its debt. Credit rating agencies have already warned that the US triple-A credit rating is at risk if there is default. The Dow Jones Industrial Average fell sharply in very early trading, but with not much other news to guide the action, the Dow was well off session lows at midday. However, another wave of sellers surfaced in late-day action and, at the closing bell, the Dow Jones Industrial Average was down 88 points. The tech-heavy NASDAQ lost 16.

Bullish
An interesting spread trades in Express Scripts (ESRX) Monday. Shares rallied 9 percent in the previous two trading sessions after the company announced plans to buy Medco (MHS). Today, ESRX gave back 65 cents to $56.65 and brisk trading in Express Scripts options continued. 48,000 calls and 18,000 puts traded in the healthcare company. Some of the top trades of the day were part of a spread, in which the strategist sold 7,800 January [2013] 42.5 puts at $2.19 to buy the January [2013] 65 - 80 call spread at $3.34, 7800X. They paid $1.15 on the three-way spread and appear to be looking for shares to remain strong through the remainder of 2011, 2012, and into 2013. If shares fall to $42.5 or less, they might face assignment on the puts (which were sold) and would be asked to buy the stock at $42.5 per share.

Bullish trading was also seen in Skechers (SKX), Broadcom (BRCM), and Oshkosh (OSK).

Bearish
Supervalu (SVU) shares lost 25 cents to $8.52 and options on the grocery chain were heavily traded ahead of earnings. The company is due to release results Tuesday morning. 23,000 puts and 4,403 calls traded in the name today. October 7 puts, which are 17.8 percent out-of-the-money, were the most actives. 10,510 traded and some of the flow was part of October 9 - 7 put spreads, with one or more investors possibly rolling bearish positions in in-the-money $9 puts to the out-of-the-money $7 puts. August 8 puts, August 9 puts, and August 9 calls were actively traded ahead of the results as well. The stock often makes volatile moves around earnings. SVU saw a one-day pop of almost 17 percent when earnings were last reported on 4/14.

Bearish flow also surfaced in Solutia (SOA), AMR, and Annaly Capital (NLY).

Index Trading
Volume in the options market was light today, but volatility moved a higher. Anxiety levels on Wall Street are on the rise amid concerns about the August 2 deadline to raise the debt limit. Budget plan talks continue in the House and Senate and President Obama address the stalemate to the nation tonight. There is some uncertainty. Consequently, CBOE Volatility Index (.VIX) moved up 1.83 to 19.35 Monday. Meanwhile, options volume in the "fear gauge" was 191,000 calls and 31,000 puts. Typical volume is 414,000 contracts. Indeed, trading was slow throughout the options market today. 422,000 calls and 389,000 puts traded across the S&P 500 Index (.SPX), VIX and other cash indexes, which is only about 60 percent the average daily volume over the past month, according to Trade Alert data. Investors might be falling into wait-and-see mode as events unfold.

ETF Action
SPDR 500 Trust (SPY) finished down 75 cents to $133.83 and noteworthy spread trading surfaced in the SPY Weeklys early Monday. Weekly options are very short-term contracts listed on a handful of popular stocks and ETFs. SPY is one of them and, in morning action; one strategist was buying Weekly 132 puts at 68 cents and selling 130 puts at 28 cents. In other words, they were paying 40 cents for this Weekly 130 - 132 put spread and did the trade a total of 30,000X. The spread is a bearish short-term bet, as the breakeven is at $131.60 at the expiration, which represents a 1.7 percent decline through Friday. Excluding commissions, the potential pay-off is $1.60 if shares fall to $130 or less, which represents a decline of 2.9 percent.