Market Rises While Berlusconi Falls 11-08-2011

Cusick's Corner
After the dust settled the market took on the upside resistance and broke through the 200-Day Moving Average, 1269 on the S&Ps. With the news that the Italian Prime Minister will step down after a critical vote, some under-invested, equity-only managers may now seem forced into this market which at this stage this seems to be the market catalyst. The focus will still be on the EU and the possible implications of any rescue programs and if there are forced liquidations in the near future. However at this time, the strength is in the Equities. Watch the inventories for Crude tomorrow; this has been highly correlated with the equities market. See you Midday.

Stock market averages have rebounded from midday losses and are holding gains late-Tuesday, as the seesaw action on Wall Street continues for yet another day. With no domestic economic data on tap until a report on wholesale inventories Wednesday, the focus is back on the Eurozone where Prime Minister Berlusconi faced a key parliamentary vote related to the ratification of Italy's debt-weighed public finances. While he appeared to have won the vote, he failed to get enough votes to win a majority in the 630-seat Chamber - which put further pressure on Berlusconi to resign. The Dow Jones Industrial Average fell on the news, but then rallied in afternoon action on headlines Berlusconi has agreed to resign once the budget legislation is approved.

Bullish
Bullish traders appear to be thinking that McDermott (MDR) may post strong earnings. Shares of the Houston, TX heavy construction company closed up 30 cents to finish $11.94. The options volume was 3X the daily average, with 21,000 calls and 2,000 puts traded. December 16 calls, which are 33.6 percent out-of-the-money and expire in 38 days, were the most actives with 10,300 contracts traded. November 12, November 13, December 14 and December 15 calls on MDR were actively traded as well. While the activity seems to include a mix of buying and selling, the heavy call activity also seems to reflect some bullish sentiment in the stock ahead of an earnings release - which is due out after the closing bell today.

Bullish trading was also seen in Netgear (NTGR), Xilinx (XLNX), and MGIC (MTG).

Bearish
A sizeable four-way spread traded in Williams Companies (WMB) Tuesday. Shares of the natural gas producer closed down 3 cents to finish $31.29. Earlier today one strategist sold 15500 November 23 puts on the stock at 3 cents and bought 15500 November 27 calls on WMB for $4.05. The same player sold 15,500 January 28 calls on WMB and bought 15,500 January 22.5 puts for 35 cents. 52 cents was paid for the four-way and the activity probably rolls out a Nov 23 - 27 combo to the Jan 22.5 - 28 bearish risk-reversal. A shareholder might have initiated the trade to hedge or "collar" a stock position in WMB.

Bearish trading was also seen in Focus Media (FMCN), Jones Group (JNY), and Equinix (EQIX).

Index Trading
CBOE Volatility Index (.VIX), which tracks the implied volatility priced into S&P 500 Index options, closed down 2.37 points to 27.48 on a day of relatively quiet trading Tuesday. The market's "fear gauge" is on a five-day 19 percent losing skid as relatively orderly trading has returned to the US equity market. In contrast to the action three months ago, when VIX hit a high of 45.45 on August 8, overall trading has been choppy, but much less turbulent than the very volatile months of August and September. Consequently, VIX is under pressure and now down around 40 percent from the extremes seen three months ago today. Volume has slowed during that time as well. 117,000 calls and 111,000 puts traded in the VIX so far today, which compares to 272,000 calls and 672,000 calls traded in the VIX pit on August 8. Anxiety levels appear to be easing at this point.

ETF Action
A large four-way spread traded in the SPDR 500 Trust (SPY) today. The so-called "SPYders" have vacillated in an out of positive territory and closed up $1.62 to finish $127.88. In morning options action, one investor sold November 111 - 118 put spreads on the fund at 23 cents, 104,000X and bought the 85 cents, 50,000X. The activity looks like rolling action - i.e. closing out a massive spread in November puts while opening a new one in December options, but down one strike. The investor might have a portfolio of stocks and might also be concerned about a market decline in the weeks ahead. With the November expiration looming in 10 days, they're probably buying another month of downside portfolio protection.