Choppy Markets Continue With Swine Flu Bringing Markets Down

The choppy markets continued with all the indices and most sectors finishing lower. The bond markets appeared to be the safe haven trade as the equity markets softened into the After Hours with the short-end of the curve - 3 month, 6 month and 2YR all benefiting. The potential impact of swine flu on short-term Q2 GDP growth could be playing a large role in this flight to bonds. Today was light on volume and non-financial news dominated the media. I would plan on taking some time to digest the Q1 GDP data tomorrow and see if the market can catch a bid going into the Fed meeting on Wednesday. See you Midday.

After Hours

Stocks opened lower Monday, as global equity markets slumped on concerns a swine flu outbreak might negatively affect the already fragile global economy. While the impact of the virus is difficult to predict and quantify, the worry is that, like with SARS in the early 90s, concerns about the flu might disrupt some business activity like air travel and tourism. Investors returned from the weekend with not much other news to work with–no hard economic data and only a handful of earnings reports. Humana (HUM) and Qualcomm (QCOM) moved higher on earnings. Dow component Verizon (VZ) fell after the phone company posted better-than-expected earnings, but revenue numbers that didn’t live up to some analyst expectations. VZ was one of 21 Dow stocks to lose ground, 9 moved higher, and the industrial average lost 51 points Monday. The NASDAQ fell 15. Risk perceptions rose and the CBOE Volatility Index (^VIX) gained 1.50 to 38.32. Options volume was light after a system outage disrupted trading on the ISE in the morning hours. 6.1 million calls and 5.2 million puts traded across the exchanges.

Bullish

Ciena (CIEN) calls were actively traded Monday. Shares slipped 38 cents to $10.83 and total options volume rose to 8X the normal levels. There was no obvious company specific news to explain the action, but it was decidedly bullish. 29,000 calls and 2,000 puts traded. A lot of the volume was concentrated in June 12.5 calls, where nearly 25,000 contracts traded or about 60X the existing open interest. In addition, with about 68 percent of the volume hitting ask-side, it appears that buyers were dominating the action and positioning themselves for a rally in shares of the network-equipment maker. Bullish trading was also seen in Eastman Kodak (EK), TJX Corp. (TJX), and Rambus (RMBS).

Bearish

Continental Airlines (CAL) shares fell $2.17 to $11.08 after news of a swine flu outbreak raised concerns about future air travel. The AMEX Airline Index (XAL) fell 2 points, or 10.6 percent, to 16.83. In CAL options, volume rose to 3X the usual levels, with 19,000 puts and 13,000 calls traded. May 10 puts were the most actives, with about 8000 traded. It appears that some investors were buying the contract on concerns about additional losses in shares of CAL. Bearish trading also surfaced in Starwood Hotels (HOT), Telephone and Data Systems (TDS), and PACCAR (PCAR).

Index Trading

The PHLX Euro Index (.XDE) saw a bit more volume than usual Monday. XDE is a cash-settled index equal to the Euro/US Dollar currency pair (multiplied by 100). The index fell 2.14 to 130.43 after the euro lost ground to the US currency. In the options market, it appears that some players might be bracing for additional losses in the euro, as XDE volume rose to 4X the typical levels and June 120 puts led the order flow. Overall, quiet trading continues in the index market. 383,000 puts and 267,000 contracts traded across all products. The S&P 500 (^GSPC), the CBOE Volatility Index (^VIX), and the Russell 2000 (^RUT) had among the most actively traded contracts.

ETF Trading

SPDR Regional Banking ETF (KRE) lost 88 cents to $20.42 and options volume jumped to almost 30X the usual levels Monday. Most of the volume was due to one strategist who apparently bought 20,000 September 20 puts, sold 25,000 September 15 puts, and sold 20,000 September 25 calls. All three blocks traded on the ISE in afternoon action and appear to be part of a bearish trade where a strategist sold calls to buy the September 20 - 15 ratio put spread. Outside of that, the SPDR Trust (SPY), the PowerShares QQQ (QQQQ), and the Select Sector Financials (XLF) had among the most actively-traded ETF options. Approximately 1.60 million puts and 1.30 million calls traded across all exchange traded funds.

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