Market in a Holding Pattern 09-28-2010

Cusick's Corner
The economic numbers are still dicey and the market is in a holding pattern. Tomorrow might bring some additional end-of-month window dressing, but watch for any headlines that may shake the confidence of these weak longs (happened last night in the overnight trade). What continues to concern me and the market is that the Financials, XLF, still lag the market and need to be more offensive if this upswing is going to have legs. See you Midday.

Major averages finished with gains despite disappointing economic data Tuesday. The tone of trading was cautious early ahead of consumer confidence numbers and after a report released early showed the Case-Shiller 20-City Price Index up 3.18 percent in July, which was a bit less than the 3.3 percent that economists had expected. A modest round of selling pressure surfaced at 10:00 ET when data showed the Conference Board's latest Consumer Confidence index falling to 48.5 in September, down from 53.2 last month and much worse than the 53.0 reading that economists had expected. However, the morning decline didn't last and by midday trading was mixed. Market action remained choppy during the second half, but thanks to a late-day push higher, the Dow Jones Industrial Average finished with a 46-point gain. The NASDAQ added 9.8.

Bullish Flow
Digital River (DRIV), an Eden Prairie, MN internet software company, finished the day up $1.69 to $33.28 and options volume hit 6.5X the average daily. There was no news on the company to explain the relative strength in the stock or the increased options volume. It seems like at least one investor expects the bullish action to continue. In afternoon trading, an investor initiated a November 28 put – 35 call bullish risk-reversal, 2500X on AMEX. According to a source on the exchange floor, an average of 82.5 cents was paid to buy the calls and sell the puts. It looks like a new position (because volume exceeds open interest in both contracts) and therefore a very bullish play in DRIV Tuesday.

Bullish options action was also seen in Avon Products (AVP), Dryships (DRYS), and Adobe (ADBE).

Bearish Flow
Pulte Homes (PHM) shares added 13 cents to $8.85 after the stock was upgraded to Neutral from Sell at Goldman Sachs Tuesday. In the options market, trading was active in the homebuilder. Approximately 13,000 calls and 2,285 puts traded in the name. Most of the action was in November 9 calls. 10,630 traded, including several blocks on the 48-cent bit in morning trading. In fact, 90 percent of the total volume was on the bid. Therefore, it appears that call writers were initiating the trades and perhaps betting that PHM won't move above $9 per share through the November expiration. PHM has struggled to break above resistance around $8.90 in recent weeks.

Bearish flow also picked up in ConocoPhillips (COP), AMR, and Potash (POT).

Index Trading
The CBOE Volatility Index (.VIX) added .06 to 22.60 Tuesday and some noteworthy put ratio spreads traded on the index late in the day. One investor paid $1.45 for the December 27.5 – December 22.5 put spread, 17000X. That is, they bought 17,000 December 27.5 puts and sold 34,000 December 22.5 puts, paying a net debit of $1.45 per 1X2 ratio spread. Similar action was seen in the January 27.5 – 22.5 put spread, which was bought at $1.40, 15000X. VIX December futures are around 29 and the January futures at 30. Today's put ratio spreads might have been initiated on the view VIX will stay around these levels (or near the lower 22.5 strike) through the December and January expirations. If so, the futures will begin to fall towards the spot VIX, likely yielding profits for the 27.5 – 22.5 put ratio spreads (which appear to be targeting 22.5).

ETF Trading
Consumer Discretionary Select Sector Fund (XLY) finished the day up 26 cents to $33.74 and options volume hit 4X the average gaily, driven by an Oct 33 – 34 strangle, apparently sold at 98 cents, 16,500X. That is, it looks like this investor sold 16,500 October 33 puts at 43 cents and sold 16,500 October 34 calls at 45 cents. If so, the strategist might be closing a position and or betting that XLY will hold around these levels (between the 33 and 34 strikes) through the October expiration (in 17 days).