Bear Tracks 05-21-2010

Cusick’s Corner
The market bounced impressively this morning. But I am in no mood to sugar coat this move -- the market is in a bear trend. AAII sentiment data is one major piece of information that I monitor which supports a bearish trend debate. AAII polled independent investors on their sentiment and this came in more bullish over the last week than it was the week before. Call me a contrarian, but if we’re at a bullish turning point that sentiment should be in the toilet. Plus, when we look at the fundamentals are we not seeing that the world is deleveraging (gold is getting crushed to pay for the debt issues)? The fall in the Aussie Dollar signaled that. Plus we have emotions running high (the Put/Call ratio just recently hit a level that I have not seen since I left the CBOE floor in 2001) and to add a little fuel to the fire, VIX is above 40. Watch this short-term trade hit some resistance and look for some potentially stronger selling on these pops. See you After Hours.

Stocks have rebounded from early losses and the major averages are positive midday on options expiration Friday. With no economic data to guide the early action, some of the focus remained on overseas markets after Japan’s Nikkei lost 2.5 percent and a 2.7 percent decline in Germany’s DAX paced a move lower in Europe’s equity markets. The Dow Jones Industrial Average fell 149 points in morning trading and dipped below the 10,000 level. However, a late session rebound in Europe’s equity markets along with strength in the financials helped lift the US market in mid-morning trading. In Europe, Germany’s DAX finished with a .6 percent loss, but UK’s FTSE finished flat and France’s CAC 40 added .2 percent. Meanwhile, JP Morgan (JPM) is up 5 percent and the best gainer in the Dow Jones Industrial Average. Select Sector Financials (XLF) are up 44 cents to $14.69 and 5.3 percent from session lows after the Senate late Thursday passed the highly anticipated Financial Reform package. The House and Senate must now reconcile two separate versions of the bill. The Financials, which were pounded in the days leading up to the Senate vote, are leading the rally on short covering following the news. After falling 376 points Thursday, the Dow is up 95 midday Friday. Trading is active due to the expiration, with about 6.6 million calls and 8.3 million puts traded at 12:30 ET.

Bullish
Ciena (CIEN) calls are very busy, as shares saw a midday spike Friday. CIEN was recently up 73 cents to $15.74 and about 23,000 call options traded. The volume represents 5X the typical volume and compares to 3,640 puts. Trading was brisk in the October 15 calls, with some players apparently paying between $2.40 and $2.45 to open new positions. 10,300 traded. May 15, May 16, and October 16 calls are seeing interest as well. There’s no news on the stock to explain the action. The Linthicum, MD communication equipment company is due to report earnings on June 9.

Citi (C) shares are up 12 cents to $3.75 now that some of the fear and uncertainty about the financial reform package have passed. Shares had suffered a one-month 27 percent loss prior to Thursday’s Senate vote. Implied volatility is now easing to 62.5, from a multi-month high of 70 yesterday. Meanwhile, trading in the options market remains brisk. 602,000 calls and 394,000 puts traded on the bank so far. The top trade is a seller of 45,000 June 3 puts at an average of 6.5 cents per contract.

Bearish
Select Sector Industrial Fund (XLI) is up 15 cents to $29.16 and trying to recover from a three-week 12.5 percent slide. In the options market, trading is brisk. 96,000 puts and 26,000 calls traded so far. The top trades appear to be part of a position adjustment after a strategist apparently sold (to close) 21,500 June 30 puts at $1.56 per contract and bought (to open) 27,000 June 28 puts at 85 cents each. This strategist might be banking some profits on the 30 puts, which are 84 cents in-the-money, and then placing another bearish bet in the out-of-the-money June 28 puts.

Sherwin Williams (SHW) is down 29 cents to $75.11 and options volume is 4X the average daily, led by a June 70 – 75 (2X1) put ratio spread, bought at 27.5 cents, 3000X. That is, the investor paid an average of $3.075 for June 75 puts and sold twice as many (or 6000) of the June 70s at $1.40. This spread is a bearish play, as it makes its best profits if SHW falls to $70 by the June expiration.

Unusual Volume Movers
Select Sector Tech Fund (XLK) options volume is running 5X the usual, with 95,000 contracts traded and call activity representing about 98 percent of the activity.

Verisign (VRSN) options activity is running 7X the usual, with 6,885 contracts traded and call volume representing about 62 percent of the volume.

Royal Caribbean (RCL) options volume is running 3X the usual, with 43,000 traded and put volume representing 86 percent of the activity.

iShares Brazil Fund (EWZ), Exco Resources (XCO), and Gamestop (GME) also have unusual volume.

Implied Volatility Movers
The CBOE Volatility Index (.VIX) is under pressure following the impressive spike Thursday. VIX rallied 10.77 points, or more than 30 percent, to 45.79 yesterday. The volatility index hit 52-week highs of 48.20 Friday morning. However, as the S&P 500 rebounded off the 1,056 level, which coincides with its 2010 closing low set in February, some of the recent fear started to ease and the volatility index is back under pressure. VIX is down 6.68 to 39.11 and has now retraced 62 percent of yesterday’s move.