Market Pulls Back on China News 08-10-2010

Cusick’s Corner
The market pulled back on the China news, but since that opening pullback the market has been in a holding pattern, waiting for this afternoon’s Fed announcement. Equities are still showing upside potential, but Bond yields are crashing and their prices soaring, creating a double dip impression. We need to see if the Fed still has any potential bullets left in the arsenal, i.e. quantitative easing M1/M2. Until then, this market looks to be happy to stay in this midday grinding range. See you After Hours.

Stocks are broadly lower on disappointing economic data and cautious trading ahead of the Federal Reserve’s rate announcement. Stock index futures fell overnight after data showed Chinese import growth slowing to 22.7 percent in July, pushing its trade surplus to $28.7 billion. In the US, the focus turned to productivity numbers. The report, released one hour before the opening bell on Wall Street, showed an unexpected decline in productivity of .9 percent during the second quarter. Economists were looking for a .1 percent increase. Meanwhile, Intel (INTC) is down 4.1 percent and weighing on both the Dow Jones Industrial Average and the NASDAQ after JP Morgan cut 2010 earnings estimates on the world’s largest chipmaker. The Dow is down 90 points and the tech heavy NASDAQ lost 34.5. The CBOE Volatility Index (.VIX) added 1.10 to 23.24 ahead of the Fed’s rate announcement, due at 2:15 ET. Overall options volume is picking up from Monday’s very slow pace, with about 3.1 million calls and 2.6 million puts traded through 11:30 ET.

Bullish
The Ultra Short Euro Fund (EUO) is seeing increasing action Tuesday. EUO, which tracks 200 percent the inverse of the euro/US dollar currency pair, is up 39 cents to $21.62 and options volume is 7.5X the average daily, with 8,660 calls and 90 puts traded through midday. The focus is on EUO August and September 21 call options. Players appear to be buying new positions in these at-the-money call options and, by doing so, making a decisive bet against the euro. These traders might have a bullish view on the dollar heading into the Fed’s interest rate announcement.

Genzyme (GENZ) is bucking the bearish trend. Shares are up 34 cents to $67.80 and one strategist initiated a substantial call butterfly spread on the biotech. In midday action, 15,000 January 75 calls were sold at $1.20. Meanwhile, 7,500 January 70 calls were bought at $3.90 each and 7,500 January 80 calls bought at 40 cents. In this fly, the middle strike (70s) were sold for the body and the higher (80s) and lower strikes (70s) were bought for the wings. The spread offers a max payoff is shares move to $75 by mid-January 2011. It might be a play on the recent buyout interest of GENZ expressed by Sanofi Aventis (SNY).

Bearish
Walt Disney (DIS) options volume is picking up ahead of the company’s earnings. The media giant, and component of the Dow Jones Industrial Average, is due to release results after the closing bell today. Shares are down 8 cents to $35.08 and, in morning trading, one investor paid 58 cents per contract for 7,500 October 31 put options. This put purchase was tied to a block of shares, according to a source on the exchange-floor, and not a straight bearish bet. Instead, it appears to be a volatility play ahead of the earnings news.

CVB Financial (CVBF), an Ontario, CA regional bank, tumbled $2.30 to $8 per share on news the Los Angeles office of the SEC has issued the company a subpoena related to underwriting guidelines and other matters. Shares tumbled on the news and put volume surged to 8,915 contracts. Typical volume in the name is about 25 contracts. Traders are very active in the September and December 7.5 puts, with some premium buyers likely taking positions on concerns about additional weakness in the share price during the months ahead.

Unusual Volume Movers
Hewlett Packard (HPQ) options volume is running 3X the usual, with 90,000 contracts traded and call volume accounting for about 69 percent of the activity.

Netflix (NFLX) options activity is running 2.5X the usual, with 80,000 contracts traded and call volume representing 50 percent of the volume.
Baxter (BAX) options volume is running 6.5X the usual, with 46,000 traded and call volume representing 91 percent of the activity.

Unusual volume is also being seen in NetApp (NTAP), MEMC (WFR), and Ambac (ABK).

Implied Volatility Movers
Implied volatility in Penwest Pharmaceuticals (PPCO) has plummeted after Endo Pharmaceuticals (ENDP) agreed to acquire the company for $5 per share in cash. PPCO is up 23 cents to $4.96 and just four cents away from the proposed takeover price. Implied volatility has plummeted 90 percent to the single digits, as it seems that players in the options market believe the acquisition has a high probability of succeeding.