Bears Have Momentum 05-18-2010

Cusick’s Corner
The bears have the momentum at this stage, even with the positive start to the day. As noted in past Corners, we could be stuck in a whippy but consolidated range-bound trade. With Euro still under pressure and the Dollar still seeing some flight to quality trade, this market seems to have hit a stage where every rally seems to be getting shorted. There is still noted weakness in Metals and Energies. As I am writing this Corner, there is news that the Germans are now banning naked shorting in certain market segments, large Financials, CDS and Euro Bonds. Watch this news play out, this action could possibly add more uncertainty to the EU situation and put some pressure on US markets as well.

Stocks are struggling to find direction Tuesday. The major averages opened higher after European equity markets and the euro steadied. France’s CAC 40 index paced an advance across Europe’s equity markets with a 2.1 percent gain. At the same time, the euro traded back above 1.24. In the US, the early focus was also on economic data. The latest housing starts numbers rose more than expected (up to 672K in April from 655K the month before) and the latest PPI showed a surprise decline of .1 percent (vs. expectations for a .1 percent increase.). Diminishing concerns about the European debt situation and mixed economic news set the tone for a positive open. However, the early advance didn’t last. The euro sank back to 1.2333 and Home Depot (HD), which reported earnings Tuesday morning, is dragging on the Dow with a 2 percent loss. However, Walmart (WMT) is helping the industrial average. Shares are up 2.8 percent after the retailer reported earnings that beat Street expectations. Consequently, the Dow Jones Industrial Average is flat at midday. The S&P 500 is down 1.5 points and the NADSAQ lost 11. Trading in the options market is running about the typical levels, with about 4.4 million calls and 4 million puts traded at 12:30 ET.

Bullish
Verisign (VRSN) shares are up 70 cents to $27.54 and options volume is running 11X the usual on news the software maker pulled out of a JP Morgan Technology Conference scheduled for later today. The news seems to have fueled some speculation about some type of company news. It’s unsubstantiated, but for whatever reason, shares are up and 30,000 calls and 14,000 puts traded so far. June 28, 29, and 30 call options are the most actives.

IShares Long-Term Bond Fund (TLT) is up $1.12 to $95.65 after weakness on Wall Street along with tame inflation data (PPI at -.1 percent in April) triggered a rally in Treasury bonds Tuesday. In the options market, noteworthy action is being seen in January 100 calls. It includes a block of 7,780 contracts at $2.80, which appears to be a buyer opening a new position. More than 8,500 traded through midday. These buyers appear to be taking positions in anticipation of additional strength in Treasuries and for the gains in TLT to continue through yearend.

Bearish
Xerox (XRX) is flat at $10.10 per share and May and June puts are seeing interest. 24,600 May 10 puts changed hands. Another 14,200 June 9 puts also traded. Open interest in the May contract, which expires at the end of the week, is more than 30,000. It appears that some of these positions are being sold-to-close and then rolled to the June puts at the $9 strike.

Crocs (CROX) puts are active. Shares are down 2 cents to $10.48 and 4,230 contracts traded. The volume represents 6X the typical volume for midday and compares to 1,150 calls. The action is scattered across September puts with strike prices ranging from 6 to 10. December 8 puts are seeing interest as well. No news on the company, but the action appears driven by put buyers – possibly hedgers looking to protect shares or speculators betting on a move lower for CROX.

Unusual Volume Movers
Visa (V) options volume is running 2X the usual, with 92,000 contracts traded and call activity representing about 63 percent of the activity.

Walmart (WMT) options activity is running 2X the usual, with 73,000 contracts traded and call volume representing about 73 percent of the volume.

Seagate Tech (STX) options volume is running 3X the usual, with 65,000 traded and call volume representing 78 percent of the activity.

Lennar (LEN), Mylan Labs (MYL), and Occidental Petroleum (OXY) also have unusual volume.

Implied Volatility Movers
Visa (V) implied volatility is moving higher, as shares fall in active trading Tuesday. Visa is down 5 percent to $70.95. Shares have been under pressure since the Senate voted to limit fees charged on credit and debit cards last week. In the options market Tuesday, trading is brisk. About 27,000 calls and 13,000 puts traded so far. Implied volatility is rallying to new 52-week highs of 47.5, up about 7 percent today.