Whiplash 08-05-2011

Cusick's Corner
What a week. The initial rally at today's open did not last long, the selling began but then Europe's response to Italian and Spanish debt problems/default risk helped bring the market back causing more whiplash. There was that bounce because the US relies on exports to Europe to help get us out of this recession while domestic demand remains low. The Fed Reserve meets this Tuesday and the FOMC Rate Decision will be announced after lunchtime. Will QE3 be on the menu? Are there any dishes left to try? Try to relax this weekend to get ready for the new week.

Stocks finished mixed on a day of high volume and extreme volatility Friday. After a 512-point plunge in the Dow Jones Industrial Average Thursday, the table was set for a rally at the opening bell today after the Labor Department said the US economy added 117,000 jobs in July. Economists were looking for an increase of about 84,000. Meanwhile, the unemployment rate eased to 9.1 percent from 9.2 percent and .1 percent better-than-expected. Average hourly earnings rose .4 percent and twice as much as forecast. Yet, while the Dow Jones Industrial Average rallied more than 170 points on the data, the gains were quickly erased and, by mid-morning, the Dow was down more than 240 points. Then, the industrial average reversed direction once again and was holding solid gains at midday. From there, volatility remained high and market action was choppy into the closing bell. At the end of the day, the Dow Jones Industrial Average had added 61 points, but the tech-heavy NASDAQ lost another 24.

Bullish
A substantial spread trades in Valeant Pharmaceuticals (VRX) today. Shares of the Canadian specialty pharmaceuticals maker lost 4.8 percent to $38.88 today and have now suffered a two-day 25.5 percent plunge after the company reported earnings Thursday morning. While the earnings per share number were ahead of expectations, some analysts seemed to have some concerns about slowing at the company's core business unit. Yet, it seems that one strategist views the decline as an opportunity for a bullish trade in VRX. In midday action, a 24,500-contract block of VRX August 38 calls traded at the $1.75 asking price while 24,500 August 43 calls traded on the 45-cent bid. The trade has the characteristics of an Aug 38 - 43 call spread for a $1.30 net debit. If so, it's a bullish short-term play that makes its best profits if shares rally back beyond $43 through the August expiration, which represents a 10.6 percent move higher over the next two weeks.

Bullish trading was also seen in Symantec (SYMC), OpenTable (OPEN) and Sprint Nextel (S).

Bearish
General Electric (GE) added 4 cents to $16.51 and was one of twenty Dow stocks to finish with gains Friday. Noteworthy spread trading was seen early Friday after one investor apparently bought 10,000 November 15 puts on GE at 81 cents and sold 10,000 November 12 puts at 24 cents. In other words, they initiated a Nov 12 - 15 put spread for a 57-cent net debit. Volume in both contracts topped more than 20,000 and the spread trading appears to be opening activity. If so, it's a bearish play that makes its best profits if shares fall below $12 through the November expiration, which represents a decline of about 27.5 percent. GE has already suffered a 13.8 percent decline over the past two weeks.

Bearish flow also surfaced in Corinthian Colleges (COCO), Textron (TXT), and Rambus (RMBS).

Index Trading
CBOE Volatility Index (.VIX) surged Friday morning and hit a high of 39.25. The market's "fear gauge" has not approached the 40 level since May of 2010. VIX dipped below 28 early, but then rallied to 14-month highs mid-morning after the Dow Jones Industrial Average came under fire and added to yesterday's 512-point loss. However, VIX added just .34 to 32 today after trading turned mixed in the second half of Friday's session. Still, the volatility index is up almost 90 percent during the past two weeks, as fears about the European Debt Crisis, the global economy and earnings have taken a heavy toll on investor sentiment. Volume has been heavy as well. According to preliminary numbers, 1.3 million calls and 1.7 million puts traded across the S&P 500 Index (.SPX), VIX and other index products today, which is about twice the recent average daily volume.

ETF Action
Trading in the SPDR 500 Trust (SPY) was heavy again today. Shares hit a morning low of $116.86 and a session high of $122.07. Yet, despite the wild swings, the SPYders lost just 18 cents to $120.08 on the day. Meanwhile, the top options trade in SPY was a block of 122,000 Sep 118 puts which traded at the $4.09 asking price. It coincided with 61,000 September 124 puts on the $6.82 bid and 61,000 September 112 puts at $2.35. The trade has all the characteristics of a Sep 112 - 118 - 124 put fly for a net credit of 99 cents. With SPY falling to $118 today (the middle strike of the spread), the strategist might have used the move as a trigger to exit the spread - because the middle strike represents the sweet spot of the spread at the expiration. That is, they're closing out this massive position because the target price of $118 per share was reached today.