The Big "R" 08-22-2011

Cusick's Corner
Double Dip, the big "R" and recession were the talk of the day. I am now playing armchair economist, if GDP is revised down again or the data actually plays out in the future that we are in a recession, well it will be too late when that is confirmed, especially for the longs. This is like watching a car trying to beat a train across the tracks even though the crossing gates are flashing and coming down. This might be graphic but the reality is that Bonds continue on a tear which is typically a sign of diminished enthusiasm about the economy -- just go back and replay the events of 2008 except now EU banks are the catalyst. Gold has been on fire and the last time we saw such a run was in October /November run in late '08, which was followed by a consolidation and subsequent pullback later the following year in the metal. These are going to be volatile markets so act accordingly, par down size and look for strategies that mitigate this volatility and uncertainty, i.e. stock replacement and spreads (we will be offering webinars on these topics soon) until there is more clarity in the market. See you Midday.

Stock market averages move in and out of positive territory and finished with modest gains Monday. The table was set for morning gains on Wall Street after four weeks of losses and on a day of modest strength in Europe's equity markets. But with no domestic economic data or earnings to guide the action, trading remained cautious and stock market averages had fallen into the red through mid-morning. However, the selling never gathered any real momentum. Both the Dow Jones Industrial Average and the NASDAQ were posting gains through midday. Market action was choppy from that point forward and the underlying tone remains tentative amid concerns about the European Debt Crisis, the risk of another credit crunch, and the short-term outlook for the global economy. At the closing bell, the Dow Jones Industrial Average had added 37 points and the tech-heavy NASDAQ gained 3.5.

Bullish
Rangegold (RGLD) shares added $3 to $73 on another day of gains for gold. The yellow metal surged $40 to new records of $1,892 an ounce Monday. Meanwhile, RGLD broke out of its recent range and rose to its best levels ever. Options volume in the Denver, CO gold miner included 4,660 calls and 1,775 puts. The top trades of the day were part of combo, in which the strategist apparently bought 370 September 80 calls on RGLD at 65 cents and sold 370 September 65 puts at 60 cents. That is, they paid a nickel for the Sep 65 - 80 bullish risk-reversal and are possibly looking for the rally in Rangegold to continue through the September expiration - which is in 25 days. September 75 calls were the most actives in RGLD today. 1,150 changed hands.

Bullish trading was also seen in Micron Technology (MU), Green Mountain Coffee Roasters (GMCR), and Symantec (SYMC).

Bearish
JP Morgan (JPM) touched new 52-week lows and finished down 94 cents to $33.41 on a day of relative weakness in the financials. JPM was the second biggest loser in the Dow behind Bank of America (BAC), which tumbled 7.9 percent. Meanwhile, in options action, the top options trade in JPM was part of a spread, in which the strategist sold 3,418 December 23 puts on the bank at 83 cents. They bought 1,709 December 28 puts at $1.60 and bought 1,709 December 18 puts at 44 cents. In other words, a Dec 18 - 23 - 28 put butterfly spread was an initiated for 38-cent net debit. This advanced options play is a bearish bet, as it makes its best profits if shares fall to $23 through the December expiration, which represents a 31.2 percent decline from current levels. The spread traded multiple times today. Total volume in the Dec 23s (the body of the fly) was 11,110 contracts.

Bearish flow also surfaced in BMC Software (BMC), Lincare Holdings (LNCR), and Western Digital (WDC).

Index Trading
It was a slow day in the index market Monday. 510,000 calls and 754,000 puts traded across the S&P 500 Index (.SPX), the NASDAQ 100 Index (.NDX) and other cash indexes, which is only 63 percent the recent average daily volume according to Trade Alert data. CBOE Volatility Index (.VIX) edged down .61 to 42.44 on a quiet day on Wall Street. One index that did see increased options action was the PHLX Semiconductor Index (.SOX). The index, which tracks the price action of leading semiconductor and semiconductor capital equipment companies, finished the day up 2.62 to 328.94. Meanwhile, option volume in the index rose to 3X the average daily. 211 contracts traded on SOX today, which isn't much. The index is not a very popular vehicle among options traders. It is primarily used as a barometer or proxy for the performance of chip stocks.

ETF Action
Select Sector Financial (XLF) lost .15 to $11.98 and settled at new 52-week lows today. XLF was lower throughout most of the day and came under pressure late in the day after Goldman (GS) shares sold off on news its Chief Executive Lloyd Blankfein has hired a hired a high profile defense attorney. A 7.9 percent drop in BofA also weighed on XLF today. Meanwhile, Weekly $12 puts on the financial ETF were the day's most actively traded contract. More than 110,000 changed hands, including a midday buyer of 60,000 contracts at 29 cents. Open interest is 13,118 contracts. So today's flow looks like opening buying of XLF Weekly at-the-money puts on concerns about additional losses in shares through the end of the week.