Buyers Take a Breather 05-13-2010

Cusick's Corner
Reported jobless claims today did not fall as much as expected. Analysts would like to see the jobless claims fall faster because that would be a sign of more hiring on Main Street. So buyers were taking a breather today and the SPX failed to push through the 1173 level with conviction. The VIX did manage to bounce up this afternoon (see Index Trading), while the market continued to fall off the midday level to close down over -1% on a relatively quiet afternoon. Look for Retail sales (a measurement of broad consumer spending patterns) tomorrow at 8:30am ET, along with Michigan Sentiment which is a survey of consumer confidence at 9:55am ET. See you Friday.

The roller coaster ride continues on Wall Street, as the stock market averages fell into the red on disappointing economic and earnings news Thursday. After a 149-point rally Wednesday, the Dow Jones Industrial Average opened lower after data released before the opening bell showed weekly jobless claims fell 4,000 to 444,000 in the week ending May 8. However, this overall jobless number was larger than the 440,000 analysts had expected. Meanwhile, shares of Cisco Systems lost 4.5 percent after the networking giant reported first quarter profits that beat Street estimates, but then issued downside revenue guidance for the second quarter. Cisco was the biggest loser in the Dow and weighed down the NASDAQ as well. Commodities were weak, with crude down $1.6 to $74.05 and gold off $9.3 to $1233.40. Overall, there wasn’t much reason for investors to cheer Thursday -- the Dow gave up 114 points and the NASDAQ lost 30.7.

Bullish Flow
Alcoa (AA) gained 2.4 percent to $12.80 and was the only Dow stock to finish with gains Thursday. Options were very busy as well. About 144,000 calls and 21,000 puts traded on the aluminum maker. The activity included a noteworthy spread in the October 12 and 16 calls, as it appears that an investor bought 20,000 of the October 12s at $2.09 per contract while selling 20,000 of the October 16 calls at 50 cents. This spread, at a $1.59 debit, appears to be a bullish play with a maximum pay-off if shares rally to $16 or more by the October expiration.

Equinix (EQIX), Leap Wireless (LEAP), Hess (HES) also had bullish order flow.

Bearish Flow
Puts were actively traded in McGraw Hills (MHP) and Moody’s (MCO) after the Senate unveiled plans for an independent credit rating agency and also voted to boost regulatory scrutiny of the existing credit rating agencies. McGraw Hills, which owns Standard & Poor’s, lost 73 cents to $29.23 and options volume jumped to 4X the recent average daily levels with about 6,000 puts and 1,400 calls traded on the session. Moody’s shares lost 59 cents to $21.70, and 64,000 puts along with 15,000 calls traded in the name.

Bearish flow also picked up in Precision Drilling (PDC), Monsanto (MON), and Jabil Circuits (JBL).

Index Trading
The CBOE Volatility Index (.VIX) hit a low of 24.3 in midday trading, but then battled back and closed up 1.24 to 26.76. The selling pressure surfaced late in the day and sent VIX to session highs just minutes before the closing bell. However, while the volatility index rallied, volume was relatively light in the index market. About 540,000 calls and 564,000 puts traded across the S&P 500 Index (.SPX), VIX and other index products. In the VIX, 167,000 calls and 116,000 puts traded on the session. June 20 and 22.5 puts were the most actives.

ETF Trading
Wisdom Tree Dreyfus Chinese Yuan Fund (CYB) has seen several days of bearish trading. Shares of the fund, which are designed to track both money rates in China and the performance of the Yuan against the US dollar, finished the day down 1 penny to $25.08 and like yesterday, October 24 puts were the flavor of the day. Open interest in the contract increased by 9,288 following a day of active trading Wednesday. Another 6,000 contracts traded Thursday. Players have been paying a dime per contract and possibly buying puts, looking for the dollar to gain against the Yuan in the months ahead.