UGLY 08-02-2011

Cusick's Corner
Ugly, that is what the market looks like at this stage with all the major indices at their worst levels this year. While this is ugly (and could get uglier), I have a hard time jumping on a ship that has sailed on the downside so long, 8 sessions in the NAZ and S&Ps. I traded counter intuitively today -- selling some volatility, selling put and call credit spreads, looking for vol to normalize into the week's end. I also have added some currency exposure, looking for some potential negative action in the dollar as stimulus talk will certainly pick up with this current market action. I am half-sizing into these types of positions, which is prudent with the market action that we have seen over the past sessions. Watch the ADP and Crude inventory numbers, if these come in worse than expected, there may be some more downside to come, counter intuitive to my vol position above but that is why I am spreading and half-sizing. See you Midday.

Stock market averages suffered steep losses on concerns about the economy, a possible downgrade to US debt, and the ongoing European financial crisis. Poor economic data helped set the tone for weakness at the open after data showed personal incomes up .1 percent and spending down .2 percent in June. While the income number was in-line with estimates, economists were expecting a .1 percent increase in spending. The drop marked the first decline in spending in almost two years. Sharp losses across the Eurozone after yields jumped in Spain and Italy Tuesday also weighed on early trading. Germany's DAX helped pace the decline with a 2.3 percent loss. In the US, some of the focus remains on Washington. Although lawmakers struck a last minute deal to raise the debt ceiling and avoid default, concerns remain that rating agencies will downgrade the US triple-A credit rating. Fear is elevated and stocks were broadly lower at midday. The selling intensified in the second half of trading. At the closing bell, the Dow Jones Industrial Average was down 265 points and very near session lows. The tech-heavy NASDAQ lost 75.4.

Bullish
Manitowac (MTW) shares lost 96 cents to $12.75 and options on the Manitowac, WI farm and construction machinery company were heavily traded today. Total volume was 17,000 calls and 920 puts, which is 5X the recent average daily volume for the name. September 15 calls, which are now 17.6 percent out-of-the-money and expiring in 46 days, were the most actives. 12,865 traded including a 1260-contract block at the 60-cent asking price on the CBOE. About 52 percent of the day's volume was at the offer, suggesting that some of the action was driven by upside call buyers looking for the stock to perform well from now through mid-September. There's no recent news to explain the heavy trading in MTW calls today. Earnings were last reported on July 26. Dow Jones Newswires options report today notes that other machinery companies - Pall Corp and Timken (TKR) - also bullish trading today. Some investors might be "call"ing a bottom in the group.

Bullish trading was also seen in Pall Corp (PLL), TEVA, and JC Penney (JCP).

Bearish
Central European Distribution (CEDC) saw a day of heavy put volume today. Shares of the Mount Laurel, NJ exporter of alcoholic beverages touched new 52-week lows and finished down 73 cents to $8.79. Meanwhile, 48,000 calls and 3,425 puts traded in CEDC today. August 9 puts, which are now 21 cents in-the-money, were the most actives. Some investors might have been closing out positions after a 61.5 plunge in shares since February. 14,572 Aug 9 puts traded against 14,507 in open interest. Meanwhile, August 6, December 5, August 8, September 10 and even December 2.5 puts on CEDC were busy as well. The heavy put activity comes ahead of the company's earnings release, due August 4.

Bearish flow also surfaced in Williams Companies (WMB), Leap Wireless (LEAP), and DirectTV (DTV).

Index Trading
CBOE Volatility Index (.VIX) dipped in morning trading, but finished the day up 1.13 to 24.79. VIX hit a low of 22.65 early and was in negative territory through midday. However, a late-day sell-off sent the S&P 500 to session lows in the final hour. The volatility index, which tracks the expected volatility priced into S&P 500 options, rallied in the final sixty minutes of trading and closed at its best levels of the day. Meanwhile, trading in the VIX options pits was very busy today. 487,000 calls and 144,000 puts traded on the session. August 30 call options on the volatility index were the most actives. 67,469 traded. August 25 and Sep 35 calls saw heavy trading as well. Some investors were probably buying short-term out-of-the-money VIX call options on concerns that market volatility will remain high in the weeks and months ahead. September is historically one of the more volatile months for the US equity market.

ETF Action
Volume was heavy in the exchange-traded funds today. 6.2 million puts and 3.9 million calls traded across the SPDR 500 Trust (SPY), iShares Small Cap Fund (IWM), and other ETF products, which is 1.5X the recent average daily volume, according to Trade Alert data. The three most actives were puts on the SPY, or "SPYders". Shares lost $3.29 to $125.79 and closed near session lows. The August 127 puts, which were at-the-money through midday, are now $1.21 in-the-money and traded 194,783 contracts. SPY 125 and 130 puts were the next most actives. Heavy trading was also seen in the iShares Small Cap Fund (IWM) Sep 75 and 77 puts, as well as SPDR Financial (XLF) Aug 15 puts. Some options traders were probably taking bearish positions in puts on the exchange-traded funds on expectations for additional losses in the weeks ahead. Others were probably closing out positions after the 8-day market decline - which is the equity market's longest losing streak since 2008.