Eyes on Election Tonight Then Tomorrow's Fed 11-02-2010

Cusick's Corner
The election results will be watched overnight, but all eyes will be on the FOMC statement tomorrow, due out at 2:15 ET. The focus will be on the size of the Fed's highly anticipated Quantitative Easing. At this point, expectations are that the Republicans will take the House and that's already priced into the market. Republicans picking up some seats in the Senate, but not a majority is also believed to be priced in. $500 Billion or more QE seems to be mostly priced in -- so what is not priced into the market? On the political front, if the Republicans take majority in Senate, this would potentially add challenge to upside resistance. From the Fed's actions, if the size and extent of QE is smaller than expected, that would be potentially negative. Either way, volatility looks to be potentially on the horizon. Enthusiasm for any potential political or economic outcome could be met with some short-term skepticism, so stay on your toes, be prudent and do not use your emotions to make your trading and investment decisions. See you Midday.

Major averages opened higher and then traded in a tight range Tuesday, as market action took a wait-and-see tone ahead of the mid-term election results and a Federal Reserve rate announcement Wednesday. With no economic data or earnings of importance to guide the early action, the focus was on a weaker dollar and strength across the commodities markets. However, after the initial run higher on Wall Street, trading stalled and the major averages stayed in a tight range throughout most of the session. Investors are not only waiting for mid-term election results to trickle in, but also for the Federal Reserve to clarify future policy action at the conclusion of its meeting Wednesday afternoon. The Dow Jones Industrial Average traded in a 95-point range ahead of the news and finished up 64 points. The NASDAQ added 28.7.

Bullish Flow
Legg Mason (LM), the Baltimore, MD asset management firm, added 93 cents to $32.27 and LM options saw a noticeable uptick in activity Tuesday. Total volume rose to 6X the recent average daily, with 6,145 calls and only 49 puts traded on the session. Much of the activity was focused in the January 2012 calls at the 30 strike. 5178 traded, including a block of 1500 at the $6.70 asking price. It appears to be an opening buyer. December 31 and 35 calls saw interest as well. No news on the name, but the stock was added to Citigroup's top list pick Monday morning. Shares are in the midst of a three-day 5.6 percent run higher and today's call buyers might be looking for the rally to continue through 2011, into early 2012.

Bullish options action was also seen in Lennar (LEN), Campbell's (CPB), and ADP.

Bearish Flow
A bearish spread trader surfaced in EOG Resources (EOG) ahead of its earnings. Shares finished the regular session up $1.67 to $97.74 and one strategist apparently initiated a bearish November 90 – 95 put spread at $1.35, 1500X. That is, they bought 1,500 November 95 puts at $2.21 and sold 1,500 November 90 puts at 85 cents. This spread is bearish because it offers a max pay-off of $3.65 (excluding commissions) if shares fall to $90 or less by the November expiration in two and half weeks. Time will tell if the spread was a smart move. EOG's earnings results have not yet been posted at the time of this writing.

Bearish flow also picked up in Kohl's (KSS), Sara Lee (SLE), and Red Robin Gourmet Burgers (RRGB).

Index Trading
Overall action in the index market seems to reflect little concern about this week's remaining event risk. Volume was light and evenly divided between put and call options. According to Trade Alert data, 428,000 calls and 429,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes Tuesday, which is about 79 percent the average daily volume for the index market. Meanwhile, the CBOE Volatility Index (.VIX) broke a six-day winning streak. As the S&P 500 added 9.19 points to 1,193.57, VIX edged down .26 to 21.57. Rising stock prices, low index put volume and an easing VIX seem to reflect underlying optimism, even as results from the mid-term elections, Wednesday's Fed rating meeting, and Friday jobs data are looming on the horizon.

ETF Trading
Put volume picked up in the Market Vectors Juniors Gold Miner ETF (GDXJ) Tuesday. Shares of the fund, which holds a basket of mining names like Newmont (NEM) and Barrick Gold (ABX), notched a new 52-week high and finished up 48 cents to $36.76 after gold added $6.5 to $1,357.10 an ounce. Some contrarian-minded investors seem to be bracing for a pullback in the ETF, however, as the GDXJ December 36 puts saw increasing interest Tuesday. 10,245 changed hands. The top trade was a block of 7,252 contracts at the $1.60 asking price, which appeared to be a buyer opening a new position. If so, the put purchase has a breakeven of $34.60 at the December expiration, or 5.9 percent below current levels.