Fed's Mood Altering Statement 08-10-2010

Cusick's Corner
The Fed’s statement boosted the market’s mood and the market recovered more than half of the day’s earlier losses. The Fed announced that it would start investing proceeds from maturing mortgage securities (on a small scale) into government Treasury bonds, reassuring the market. The Fed hopes this action may stimulate lending to consumers and businesses and ensure that there are adequate supplies of cash to keep the recovery going. This announcement sent Treasurys higher and yields even lower, the yield on the 10-yr Note is down to 2.75% which is the lowest in over a year. See you Midday.

Volatility picked up on disappointing economic news and heading into a Federal Reserve rate announcement, but things had settled down by the closing bell Tuesday. Stock market averages slipped in morning trading following disappointing trade balance numbers from China and after the latest productivity report showed a .9 percent drop during the second quarter. Economists were looking for a .1 percent increase. Meanwhile, Intel (INTC) shares traded down 4 percent and weighed on both the Dow and NASDAQ after JP Morgan cut earnings estimates on the chipmaker. The tone of trading turned to wait-and-see late-morning and into the Federal Reserve rate announcement. Fed officials left rates unchanged and signaled no changes to monetary policy. Trading turned a bit choppy around the news headlines, but at the closing bell, the Dow Jones Industrial Average was down just 55 points and 92 points off session lows. The NASDAQ lost 28.5.

Bullish Flow
Kinross Gold (KGC) saw a day of heavy options trading. Shares of the Toronto-based miner lost 10 cents to $15.67, even as gold finished up $3.6 to $1,205 an ounce. In KGC options action, 14,000 calls and 1,560 puts traded on the day. September 18 calls were the most actives. 8,940 changed hands. Another 1,590 September 17 calls traded on the session. The increasing action comes a few days after the company announced plans to buy Red Back Mining in a $7.1 billion deal. Shares are down 4.1 percent since the announcement and some players in the options market might view the recent weakness as an opportunity for bullish trades in KGC September options.

Expeditors International of Washington (EXPD), Deutsche Bank (DB), and Sonus Networks (SONS).

Bearish Flow
Novartis (NVS), the Swiss-based pharmaceutical giant, finished the day up 75 cents to $51.23 and options volume hit 9X the average daily, with about 12,000 puts and 320 calls traded on the session. The action was concentrated in the September 50 puts. It included a buyer of 5,400 contracts at $1 even. More than 11,000 traded at the end of the day. Since open interest is only 62 contracts, the action looks like opening put buyers, possibly hedging shares or looking for a bearish move in the underlying stock from now through September.

Bearish flow also picked up in BofA (BAC), LSI Logic (LSI), and MGIC Investments (MTG).

Index Trading
CBOE Volatility Index (.VIX) hit a morning high of 24.24, but finished the day up just .23 to 22.37. Options volume jumped, with 187,000 calls and 269,000 puts traded on the volatility index, which is 2.5X the typical volume. A massive three-legged spread accounted for a good chunk of the activity. In afternoon action, one investor sold 50,000 August 25 – 22.5 put spreads to buy 50,000 September 25 puts. The action looks like a position adjustment, or rolling out of the August spread to open a new position in September. This strategist might be hedging a position in VIX futures or making a bearish bet on market volatility.

ETF Trading
Technology Select Sector ETF (XLK) saw relative weakness and increasing put volume after JP Morgan cut earnings estimates on Intel (INTC), the world’s largest chipmaker. INTC shares lost 4 percent and XLK, which holds all of the technology names from the S&P 500, gave up 23 cents to $22.20. In XLK options action, the focus was on the August 22 puts. The top trade was a block of 2,000 at the 22-cent Ask price. At the end of the day, 23,300 traded and 81 percent hit at the Ask. Some investors were probably buying these puts as short term hedges should the weakness in the tech sector continue. August options expire a week from this coming Friday.