Playing Chicken 07-26-2011

Cusick's Corner
We finished right on the lows and the bureaucrats in Washington still think that it is ok to continue to play Deficit Chicken. The pullback in the Buck was something that caught my eye and explained the run in the Commodities, XLE/DBC/FCX, so these are the sectors that investment will be pouring into at this stage of the market. Until we get some idea how this debt ceiling issue will be resolved, money flow will be somewhat jittery. See you Midday.

Market action was mixed into midday, but stock market averages slipped in afternoon trading and finished with losses Tuesday. Economic data released early showed a surprise increase in the Consumer Confidence index for July, which rose to 59.5 from 57.6 in June. Economists were looking for a reading of 56.0. However, a separate report showed New Homes Sales falling to an annual rate of 312K in June, from 315K and compared to 320K consensus. Earnings results were also mixed. Broadcom (BRCM) rallied 9.4 percent and was among the best gainers in the NASDAQ 100 after the chipmaker's profits topped Street estimates. RadioShack (RSH), Weatherford (WFT), and Baidu.com (BIDU) were also up on earnings news today. However, 3M (MMM) lost 5.4 percent and was biggest loser in the Dow Jones Industrial Average after the company posted disappointing results. US Steel (X), Eastman Kodak (EK), and BP also saw post-earnings weakness. Trading was choppy on the mixed economic and earnings into midday, but some selling pressure surfaced late in the day. Anxiety about the budget impasse and the August 2 deadline to raise the debt ceiling seems to be weighing on investor sentiment. At the end of the day, the Dow Jones Industrial Average was down 92 points. The tech-heavy NASDAQ lost 2.8.

Bullish
Community Healthcare (CYH) call options were being bought today. Shares lost 4.8 percent yesterday and moved lower along with other hospital operators after HCA posted disappointing earnings. HCA's weak results were the result of lower admissions and a shift to less-acute cases. CYH edged up 18 cents to $25.89 today, however, and options volume was 4.5X the average daily. 6,675 calls and 600 puts traded on the hospital operator. The top trade of the day was a 1,000-contract block of August 29 calls at 25 cents on the ISE. The next biggest was 950 August 28 calls at 45 cents, also on the ISE. Data from the ISE indicate that both trades were opening call buyers. August 27 and 30 calls saw interest as well. Some investors might be taking bullish short-term positions in CYH after yesterday's weakness and on hopes for a post-earnings rally when the company reports on July 28. August options expire in three and a half weeks.

Bullish trading was also seen in Marvell Technology (MRVL), Juniper Networks (JNPR), and Temple Inland (TIN).

Bearish
Homebuilder Hovnanian (HOV) shares lost 9 cents to $2.07 after data released Tuesday morning showed New Home Sales falling to an annual rate of just 312,000 in June. Economists were expecting an increase to 320,000 from 315,000. Meanwhile, options volume in HOV hit 10X the average daily after 7,760 puts and 1,150 calls traded in the name. The top trade of the day was a 563-lot of Sep 1.5 puts at a dime when the market was 0 to 10 cents. Looks like a buyer opened a new position. 2,872 traded on the day against zero contracts of open interest. The Sep 1.50 put on HOV is 27.5 percent out-of-the-money and expires in 52 days. Some shareholders might have been buying the contract to hedge the risk of further losses in HOV ahead of earnings, which are expected late-August.

Bearish flow also surfaced in DR Horton (DHI), Barclay's Bank PLC (BCS), and Savient Pharmaceuticals (SVNT).

Index Trading
CBOE Volatility Index (.VIX) made a run higher late and closed above the 20 "psyche" level Tuesday. VIX gained .88 to 20.23 and is up 15.5 percent so far this week. Anxiety levels started rising after the weekend when politicians continued to bicker over competing plans and failed to reach any sort of an agreement to solve the nation's budget problems ahead of the August 2 deadline to raise the debt ceiling. Meanwhile, options volume in the "fear gauge" was lopsided today, with 300,000 calls and 97,000 puts traded in the VIX - a ratio of more than three-to-one. August 27.5 and August 30 calls were the most actives. Some investors might be taking positions in VIX upside calls on concerns about a spike in market volatility between now and the August expiration, which is in three weeks for VIX options (because the expiration is on a Wednesday).

ETF Action
SPDR Retail Trust (XRT) moved 66 cents higher to $55 on encouraging earnings news from Supervalu (SVU), Office Depot (ODP), and RadioShack (RSH). In XRT options action, 67,000 puts and 760 calls traded on the ETF. A large percentage of the volume was due to one spread trade, in which the investor sold about 40,000 December 44 puts at 64 and 65 cents and bought 15,000 December 50 puts at $1.75 and $1.76. Open interest in the Dec 44 puts is more than 40,200 and the second largest position in XRT options. The contract is now $11 out-of-the-money. So, it's possible that the spread trade was a roll - or closing out the Dec 44 puts to open a smaller position in the Dec 50 puts. An institutional investor might have initiated the trades to hedge a portfolio or retail stocks.