Bonds Tell the Story 07-29-2011

Cusick's Corner
I wish that the mainstream media would focus on the data that has been coming out and not the debt debate, we know what that debt is and so the market can anticipate the effect. What has not been focused on or talked as much is the recent data, specifically the Orders and GDP-Adv flag potential growth weakness. I mentioned earlier in the week that we have to watch the action in the higher beta Small Caps, IWM below 82, and it has broken support and is increasing in weakness, ready to challenge the longer term support, IWM 76. If this is broken then we are getting a potential signal that the economy is weaker than expected and that is not good. One other point that the market is shaking off the debt debate, BONDS, they are strong, especially on the short end of the curve, 10yr and below, have just exploded to the upside. The longer term, 20-30 yr TLT, is lagging if this segment does pick up and breaks resistance, 98 on the TLT, like it did on the shorter end of the curve then it could be another potential negative signal for equities as well. See you After Hours.

Stock market averages are lower on disappointing data and worries about the US debt situation midday Friday. The table was set for morning weakness on Wall Street after the latest GDP report showed the economy growing at a 1.3 percent annual rate in the second quarter. Economists were looking for an increase of 1.7 percent. Stock market averages remained under water through a second round of mixed economic data released later. The Chicago PMI showed a decline to 58.8 in July, from 61 in June. However, economists were expecting the gauge of manufacturing activity to fall to 58. Meanwhile, the University of Michigan consumer sentiment index saw a decline to 63.7 in late July, from 63.8 mid-month. Economists were expecting it to hold steady at 63.8. A lot of the focus remains on Washington as well and stock market averages saw a mid-morning lift after President Obama said the two parties are not miles apart regarding their competing budget plans. However, the mid-morning rally was short lived and the Dow Jones Industrial Average is down 73 points. The tech-heavy NASDAQ lost 5.5. CBOE Volatility Index (.VIX) is up another 1.74 to 25.48. Trading in the options market is very active and reflects the cautious underlying sentiment, with 5.8 million calls and 6.4 million puts traded through 12:45pm ET.

Bullish Flow
An interesting spread trades in the Wellpoint (WLP) today. Shares are down 73 cents to $67.66 and one investor sells 2500 December 65 puts and 77.5 calls (a strangle) at $5.15 and buys 5,000 December 70 - 75 call spreads at $1.70. They're basically selling a strangle to buy a bullish spread. The risk to the position is from a dramatic move higher or lower because the December 65 puts and 77.5 calls are not covered. If shares sink below 65, the strategist could face assignment on the puts and if WLP rallies beyond $77.50, they'd face assignment on the calls. The investor is possibly a willing buyer of Wellpoint at $65 and expects shares to move higher, but not significantly beyond $77.5 through the December expiration.

American Axle (AXL) shares added $1 to $11.54 after the Detroit auto parts maker surprised the Street by posting a 65-cent per share quarterly profit. Analysts were expecting 44 cents. Shares rallied on the news and the top options trade in AXL today is a seller of 6,500 January 2013 7.5 puts at $1 per contract. This investor might be a willing buyer of the stock at $7.5 through January 2013, which represents a 35 percent discount to the current market price.

Bearish Flow
STEC plummets to new 52-week lows and options on the Santa Ana, CA data storage device maker are heavily traded after the company reported weaker-than-expected second quarter results and issued a warning for the third quarter. The stock was hit with multiple analyst downgrades today and STEC is down almost 40 percent to $10.16 on the session. 29,000 puts and 9,700 calls traded in the name through midday. November 11 puts, which are now 7.6 percent in-the-money, are the most actives. 10,300 traded. November and January 10 puts are seeing interest as well. Players seem to be flocking to STEC puts on concerns about additional losses in shares in the months ahead. However, premium sellers are driving some of the flow as well.

EMC, another storage device maker, is trading down 49 cents to $26.10. Meanwhile, 41,000 puts and 7,490 traded in EMC today. The top trade is a block of 18,900 January 17.5 puts at the 19-cent asking price. Another 16,000-contract block of January 20 puts changed hands at 36 cents. Both traded on the International Securities Exchange, where data indicate that both blocks were bought. The 17.5s were bought-to-close and the 20s bought-to-open. A large shareholder might have initiated the opening purchase in Jan 20 puts to hedge a stock position.

Unusual Volume
Annaly Capital (NLY) options volume is running 3.5X the (22-day) average, with 87,000 contracts traded and call activity accounting for 59 percent of the volume.

EMC options volume is 2X the average daily, with 48,000 contracts traded and put volume representing 85 percent of the activity.

STEC options volume is running 5X the average daily, with 38,000 contracts traded and put volume representing 76 percent of the total volume.

Increasing options activity is also being seen in Cemex (CX), Waste Management (WM), and Finisar (FNSR).

Implied Volatility Mover
Annaly Capital (NLY) implied volatility is rallying today amid heavy trading in NLY options. Shares touched new 52-week lows are down 44 cents to $16.83 on volatility in Real Estate Investment Trusts [REITs] amid concern about the US debt situation. Shares plummeted to a low of $14.05 on heavy volume at the open. Meanwhile, 57,000 calls and 39,000 puts have traded in the name so far. Typical volume at midday is 17,000 contracts. Heavy trading is driving implied volatility in NLY options up 48 percent to 35 on the day.