SPX Held Key Support 1139 09-21-2010

Cusick's Corner
The market finished the day basically where it started and the Fed did nothing to spook it, as they did with their surprise quantitative easing in August. While they have still left that on the table (could explain the pullback), the SPX held key support of 1139, keeping the rally intact. We are seeing bullish market strategists take advantage of some sector volatility by utilizing spread strategies. A large out-of-the-money BAC butterfly traded today, potentially mitigating both premium and volatility risk while taking advantage of their sentiment on direction and volatility. Watch the Claims data due out at 8:30 ET, followed by Home Sales due out at 10:00 ET. See you Midday.

Stocks finished mixed after big gains Monday and after the Federal Reserve Open Market Committee [FOMC] concluded its latest meeting on monetary policy and offered investors no real new information. As expected, Fed officials left rates unchanged, but vowed to ease policy as needed to fight deflation in the future. Earlier in the day, economic data was in focus after data showed Housing Starts improving to an annual rate of 598K in August, up from 541K in July and better than the 550K that economists were expecting. However, Building Permits, a better gauge of future activity, increased by a more modest 10K to 569K (vs. 560K consensus). After a 146-point rally Monday, the Dow Jones Industrial Average struggled at the open despite strong housing data and was modestly lower into midday. A rally sent the Dow to session highs after the FOMC announcement at 2:15 ET. The gains faded in the final hour but the industrial average still finished with a modest 7-point gain. The NASDAQ lost 6.5.

Bullish Flow
Chipmaker Nvidia (NVDA) shares saw relative strength, gaining 58 cents to $11.29, and was the best gainer in the NASDAQ 100 Tuesday. There didn't seem to be any company-specific news to explain the strength, but increasing call volume also accompanied the move. About 34,000 contracts traded on the chipmaker, which is more than double the normal levels and about 5X the day's put volume. In addition, October 12 calls were the most actives. Of the 9,625 traded, 72 percent traded at the Ask, indicating the call buyers were dominating the action and possibly looking for NVDA to move beyond $12 in the weeks ahead.

Bullish flow was also detected in Boston Scientific (BSX), Plains Exploration (PXP), and AMR.

Bearish Flow
An impressive block of puts traded on Citigroup (C) Tuesday morning. Shares finished the day down a nickel to $3.94 and in early action were trading just north of $4. Meanwhile in the options market, one player bought a block of 70,000 Weekly puts on Citi for 4 cents per contract early in the day. These puts expire at the end of the week on 9/24, and this strategist showed good timing. The contract is now 6 cents in-the-money and bid at 6 cents. 107,000 of these weeklys traded total.

Bearish flow also picked up in Gannett (GCI), DR Horton (DHI), and Teradyne (TER).

Index Trading
The CBOE Ten-year Treasury Note Index (.TNX) doesn't see a lot of options action, but it's worth watching because it tracks the yield on the ten-year Treasury bond, multiplied by a factor of 10. The ten-year had a good day, gaining 1 1/32nd after Fed officials vowed to fight deflation with loose monetary policy if needed. Consequently, the yield on the ten-year, which moves opposite to price, fell to 2.58 from 2.70 late Monday and TNX dropped to 25.80. The index is now down 7.2 percent since September 13, but still above the recent 52-week low of 24.99 set in late-August.

ETF Trading
A large block of call options traded on the SPDR Homebuilder Trust (XHB) on the heels of better-than-expected housing numbers Tuesday. XHB holds some of the leading companies from the homebuilding and housing industries and finished up 7 cents to $15.64. In morning trading one investor bought a block of 50,000 January 2012 calls at $2.56 per contract. This player is paying a whopping $12.8 million in premium (plus commissions) and seems to have a very bullish view on the builders for the rest of this year and into 2011. Rather than buying shares, they appear to be taking a massive position in longer-term calls as a way to play XHB.