Cusick’s Corner 02-03-2012
I wouldn’t call myself at this moment a contrarian, but just coming from the perspective of a tired trader, I think that the market will need to rest. I say this because we saw today an acceleration of the unwind in the Bonds, TLT, and that money will have to go somewhere and for some traders at this stage, equities may appear more appealing. Crude did recover into the after hours, $97.80 +1.44, and if the data is telling us that recovery is in motion then we could see demand potentially pick up. If there is a challenge to the downside in “Texas Tea” and we get through $95, equities could take a little pullback break. See you Midday and have a great weekend.

Stock market averages rallied on jobs data early and then traded in a narrow range throughout the rest of the day Friday. Economic news helped set the stage for morning gains on Wall Street after the Labor Department said the US economy added 243,000 jobs in January, which was much better than the 155,000 that was expected. Meanwhile, the unemployment rate fell to 8.3 percent from 8.5 percent. Economists were expecting the rate of unemployed to hold steady at 8.5 percent. Separate data showed Factory Orders up 1.1 percent and .4 percent less-than-expected. However, the ISM Services Index for January, which tracks nationwide economic activity outside of manufacturing, jumped to 56.8 in January, from 53.0 in December and much better than the 53.1 that was expected. The focus, however, was on the strong headline payroll number. European equity markets also finished higher and UK’s FTSE helped pace the advance with a gain of 1.8 percent. Bonds fell and gold gave up some of its recent gains, as more capital was flowing out of “safe havens” and back to the equity market. Gold tumbled more than $30 to $1728 an ounce. Crude added $1.45 to $97.81 a barrel. On Wall Street, the Dow Jones Industrial Average was up 156 points midday and didn’t do much from that point forward. The Dow added 157 points on the day and finished 8 points from session highs. The NASDAQ gained 46 points.

Bullish
Abercrombie & Fitch (NYSE:ANF) saw a sizable options trade late Friday. Shares of the teen apparel retailer were up 11 cents to $40.51 and attempting to stabilize from a 13.7 percent loss the day before. The stock came under pressure Thursday and touched new 52-week lows after reporting disappointing January same store sales numbers. ANF has a 45.6 percent loss since October. One player in the options market seems to be anticipating a rebound, however. In afternoon options action, 10,000 May 32 puts were sold on Abercrombie at 89 cents per contract. Meanwhile, May 42 – 50 call spreads were bought for $2.15, 5000X. In other words, the investor sold May 32 puts, which are 21 percent out-of-the-money, to buy half as many upside May call spread on the stock. The initiator of the spread is probably a willing buyer of the stock if it falls to $32 or less and is writing the $32 puts, but they also initiated a call spread to participate if shares see a short-term rebound instead.

Bullish trading was also seen in Masco (NYSE:MAS), Dryships (NASDAQ:DRYS), and Boston Scientific (NYSE:BSX).

Bearish
Sysco (NYSE:SYY), a Houston, TX food wholesaler, might be worth watching Monday. The company is due to release earnings ahead of the opening bell. Shares edged up 27 cents to $30.90 ahead of the news Friday and options volume on the stock was 6X the daily average. 11,000 puts and 9,300 calls traded in the name. Some investors might be anticipating a potentially volatile move in the underlying when the numbers are released, as February 30 puts were the most actives in the name. 7,771 traded, including a 3,116 contract block for 25 cents on the ISE. Data from the exchange indicate an investor bought-to-open a new position. The contract is 2.2 percent out-of-the-money and will expire worthless if shares hold above $30 over the next two weeks – and through the February options expiration. Feb 31 puts and calls on SYY were actively traded as well and implied volatility rose 16 percent to 21 ahead of the results.

Bearish trading was also seen in Popular (NASDAQ:BPOP), MIP Technologies (NASDAQ:MIPS), and Pets Mart (NASDAQ:PETM).

Index Trading
Trading in the options on the CBOE Volatility Index (.VIX) was very busy Friday. The market’s “fear gauge” hit a morning low of 16.1 and finished the day down .88 to 17.10. VIX is at its lowest levels since July 2011, but some investors appear to be forecasting potential volatility in the index in the months ahead. The biggest trade in the VIX pit today was an April 20 put – May 26 calls strangle, bought for $4.45, 60000X. The strategist apparently bought both the April 20 puts and May 26 calls to open a new position. This massive strangle purchase can make money if VIX (forward values) see a substantial drop through April and/or a sizeable spike through mid-May. Total volume in the VIX today was 434,000 calls and 188,000 puts.

ETF Action
Volume in the iShares Emerging Markets Fund (EEM) was impressive Friday. Shares gained 72 cents to $43.88 and have now rallied more than 15 percent year-to-date. Emerging markets have been rallying amid diminishing concerns about the impact to the global economy from the European debt crisis. Options volume on the EEM seemed to reflect somewhat contrary sentiment, however, as 892,000 puts and 234,000 puts traded in the product today. Massive put butterfly spreads accounted for a good chunk of the volume. In afternoon trading, an investor was selling March 41 puts for the body of the fly. They also bought half as many March 39 puts and March 43 puts for the wings. This 1X2X1 put butterfly spread seems like a bearish play targeting the middle strike of the spread (41), or a decline of about 7 percent. It traded multiple times. Volume in the 41 puts – the body or “sweet spot” of the fly–surged to more than 400,000 contracts Friday.

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