Bond Markets React to Potential Fed QE Program

Cusick’s Corner
The economic data continues to disappoint – the Durable Goods number dampened growth forecasts for the upcoming months, coming in well below estimates. The shorts are right at this stage and they are getting more and more confirmation from the overall market data. This is very tough on traders because this leads to whippy downside price action, but the upside squeezes are not producing the pressure that would warrant a short-term long. Crude, CLV10 71.40, continues to take pullback from the $75 level with little support at this stage – a reflection of bearish sentiment due to the potential for further economic slowdown. The Bond market is also confirming a bearish sentiment, the 30 Yr price (USU10) is moving up like a bottle rocket. Looking at current bond trading trends, it appears like market players are trying to make a move in front of the Fed’s potential expansion of their quantitative easing program which is an advance that is not worth fighting. See you After Hours.

The major averages slumped again on disappointing economic data Wednesday. The focus early was on the latest Durable Goods report, which showed an uptick of just .3 percent in July. Economists were looking for an increase of 3 percent. Then, thirty minutes into trading, the market was hit with another dose of somber housing data. New Home Sales fell to an annualized rate of just 276K in July, down from 315K the month before and much worse than the 334K that economists had been expecting. The Dow Jones Industrial Average traded lower on the data, but after yesterday’s 134-point loss, was able to battle back from its worse levels. The Dow is off 40 points to 10,000, up 61 points from session lows. The NASDAQ lost 4.5. The CBOE Volatility Index (.VIX) edged up .30 to 27.76. Trading in the options market is active, with about 3.8 million calls and 3.45 million puts traded through 12:30 ET.

Bullish
The biggest equity options trades through midday appear to be bullish trades on Citigroup (C). The stock has had a rough month of August so far, falling 10.5 percent. With shares down another nickel to $3.66 today, one investor bought a block of 15,000 October 4 calls at 9 cents per contract. Separately, another buyer paid 4 cents per contract for a block of 17,000 December 5 calls. A third big trade in Citi was a block of 11,000 December 3 puts, apparently sold at 9 cents apiece.

American Eagle (AEO) shares rallied 93 cents to $13.42, even after the retailer posted earnings and revenues that met analyst estimates. There were no real surprises in the report. Nevertheless, the stock is up 7.5 percent and options volume is running 4X the average daily, with about 16,000 calls and 2,750 puts traded through midday. Some of the call volume is likely closing, as AEO saw active trading last week ahead of the news.

Bearish
Cadence Design (CDNS), a San Jose, California based software maker, has seen two days of heavy put trading. Open interest in CDNS puts increased by 8,947 following a day of active trading Tuesday (compared to just +60 calls.) Today, shares added 7 cents to $6.84 and options volume is 12X the recent average daily, with another 15,000 calls and 1,035 puts traded in the name. February 6 puts are the most actives. 7,746 changed hands and, with 91 percent of the flow trading at the ask, it looks like put buyers are dominating the action. It isn’t clear what is driving the action because there haven’t been any negative headlines in the name lately. Nevertheless, it looks defensive and to reflect concerns about the outlook for the shares in the months ahead.

United Healthcare (UNH) adds $1.12 to $32.16 and a noteworthy trade in the managed care company Wednesday morning is a seller of 10,000 September 31 straddles (puts and calls) at $2.06 (61 cents + $1.45). Looks like this strategist is opening a new position because volume exceeds open interest in both contracts. If so, they probably expect the stock to dip and hold around $31 per share through the September expiration.

Unusual Volume Movers
United Healthcare (UNH) options volume is running 3X the usual, with 29,000 contracts traded and call volume accounting for about 56 percent of the activity.

Apollo Group (APOL) options activity is running 2X the usual, with 26,000 contracts traded and put volume representing 93 percent of the volume.
Cemex (CX) options volume is running 4.5X the usual, with 26,000 traded and call volume representing 58 percent of the activity.

Unusual volume is also being seen in American Eagle (AEO), UAL (UAUA), and the PHLX Bank Sector Index (.BKX).

Implied Volatility Movers
Implied volatility in Gigamedia (GIGM) surged after a newsletter suggested that investors should buy GIGM calls. The stock is up 21 cents to $2.17 and options volume is 27X the average daily, with about 20,000 calls and 480 puts traded in the name so far. Implied volatility surged 83 percent to 79.