Market Reacts to Fed Accouncement as Expected 01-26-2011

The market reacted to the Fed announcement as expected and the statement showed that the Fed is watching commodity price volatility/inflation, but this has not shifted into a change in current interest rate levels. The market now looks like it will continue to hit resistance, 1300 on the S&P, and now there is continued focus on earnings in the short-term, which has led to some profit taking and refocuses on the EU. In terms of strategies, consolidation could be the action in the short-term unless we get any headlines out of the DAVOS conference in Europe. Stuck in New York, snowstorm, so the newsletter may not go out tomorrow but I will try. See you Midday.

Stock market averages finished with modest gains following mixed earnings news, strong housing data, and further pledges of liquidity from the Federal Reserve. Boeing (BA) lost 3.1 percent and was the biggest loser in the Dow Jones Industrial Average after its results fell shy of analyst estimates. Yahoo (YHOO) and Computer Associates (CA) also suffered post-earnings losses. However, strong housing data seemed to offset some of the worry about earnings after a report released Wednesday morning showed New Home Sales increasing to an annual rate of 329,000 in December, which was up from 280,000 in November and better than the 300,000 that economists had expected. The Federal Reserve came into focus later in the day. Officials concluded their meeting on monetary policy and, as expected, left rates unchanged. The Fed also said its bond buying plans are needed and that rates are likely to remain low for an extended period of time. In the end, the post-meeting statement held no unpleasant surprises. The Dow Jones Industrial Average added 8 points on the day. The tech-heavy NASDAQ gained 20. The CBOE Volatility Index (.VIX) lost .95 to 16.64.

Bullish Flow
CommtechTelecommunications (CMTL) shares rallied and call options volume bubbled Wednesday. Shares of the Melville, NY communication equipment company rallied $2.42 to $28.91 after the DealReporter said the company could be the subject of a ViaSet takeover. The thought of a Commtech takeout triggered a flurry of options action. 4,720 calls and 320 puts traded in CMTL today. Some ambitious traders were focused on the February 32.5 calls, which are 12.4 percent out-of-the-money with 22 days of life remaining. 1,800 traded on the day. March 25, March 27.5, March 30, and Feb 27.5 calls were actively traded as well.

Bullish trading was also seen in KB Homes (KBH), Corning (GLW), and Jacob Engineering (JEC).

Bearish Flow
Toyota Motors (TM) shares are back under pressure after the company announced a major recall of 1.3 million vehicles worldwide for fuel system issues. TM lost $1.57 to $82.29 and options volume was more than double the recent average daily. 4,220 puts and 585 calls traded on the day. February 80 puts were the most actives. 2,445 changed hands. March, April and July 80 puts saw interest as well. In addition, 75 percent of the day's put volume traded at the asking price, according to data from web information site WhatsTrading.com, which indicates that buyers were dominating the action in TM puts Wednesday.

Bearish flow also surfaced in Weyerhaeuser (WY), Eastman Kodak (EK), and PetsMart (PETM).

Index Trading
S&P500 Index (.SPX) options saw interesting trading activity this morning. The Index settled the day up 5.45 to 1,296.63 and early trades were focused on the February 1,360 – 1,370 call spreads. 21,225 traded at 25 cents. More than 36,000 traded on the day and, according to a source on the exchange floor, the spread was being sold. This spread is a bet that the S&P will hold below 1,360 (about 5 percent above current levels) through the February expiration in 22 days. It's a high probability-low reward play because the calls are so deep out-of-the-money. The risks are high as well and, per spread, equal the difference between the two strikes (1,360 – 1,370) minus the credit received, or 9.75 per spread plus transaction costs. They're taking in 25 cents at the risk of losing 9.75.

iSharesSmall Cap Fund (IWM) added $1.24 to $79.12 and options volume on the ETF included 572,000 puts and 208,000 calls. The put volume is about double the typical volume for the small cap fund. March 72 and 77 puts were the most actives. More than 90,000 traded in each. One investor was buying the spread. They paid $1.06 on 30,000 and $1.07 on 55,000. The spread (buying the 77s and selling the 72s) is a bearish play, or perhaps a hedge, as it makes its best profits if shares of the small cap fund fall to $72, 9 percent, or less by the March expiration.