Employment Weighing on the Market? 09-01-2011

Cusick's Corner
The market broke down into the close with pressure from Finance, GS news weighed on it -$4, and the uncertainty with the pending employment numbers, all reflecting continued high volatility of 31.81. Tomorrow will be volatile into the open and long weekend, and while some of us are looking for volatility to come off into the end of the day and weekend, the reality is that the data tomorrow could only increase uncertainty. I will admit that this pullback looks more like a light volume push after a fast move to the upside with little rest. Not to get to technical but saw some potential indecision in GLD, MA, BIDU (inside day) and CIEN (read below) which are just a few on the list but worth mentioning. See you Midday.

Stock market averages finished near session lows ahead of key jobs data Friday. Trading was orderly in the first half of trading Thursday, as investors digested a hefty dose of economic and stock news. Before the opening bell, the Labor Department reported that filings for jobless benefits declined by 12,000 to 409,000 last week. Economists were expecting a drop of 14,000. Now attention turns to monthly numbers Friday morning. Economists expect tomorrow's report to show the US economy adding 100,000 jobs in August and the unemployment rate holding steady at 9.1 percent. Other data released Thursday included the latest ISM Manufacturing Index for August, which edged down to 50.6 from 50.9 in July and better than the 48.5 that was expected. Construction spending fell 1.3 percent in July, however. Economists had predicted a decline of .1 percent. Meanwhile, the auto makers were in focus after Detroit's Big Three posted August sales numbers. Ford (F) and GM both finished lower on the heels of their results. The latest monthly same store sales numbers were also out Thursday. Macy's (M) and Costco (COST) are among the names moving higher on the results. Trading was uneventful on the mixed news through midday, but then selling pressure surfaced in the second half. There didn't seem to be a specific catalyst for the weakness. Some investors were likely closing out positions ahead of the jobs numbers and the three-day Labor Day weekend. At the end of the day, the Dow Jones Industrial Average was down 120 points and the tech-heavy NASDAQ had lost 33.4.

Bullish
Blue Coat Systems (BCSI), a Sunnyvale, CA business software developer, saw relative strength and increased options action today. Shares finished the session up 9.2 percent to $16.03 and have now rallied 30.9 percent since the stock touched a new 52-week low of $12.25 two weeks ago. Options volume on BCSI today was 6,680 calls and 1,810 puts. By way of comparison, typical volume is about 1,700 contracts. October 15 calls, which are now more than $1 in-the-money, were the most actives. 2,360 traded. September 16 puts, September 16 calls, and January 17.5 calls on the software maker were busy today as well. The rally in the stock and high options volume might be in reaction to news that the company has entered into an agreement with Elliott Associates. Under the term, Elliott is forfeiting its rights to build an additional stake in the company in order to enter non-public discussions with Blue Coat - possibly raising hopes the discussions will lead to ways to enhance shareholder value.

Bullish trading was also seen in Cisco Systems (CSCO), Ciena (CIEN), and Dunkin Brands (DNKN).

Bearish
Liz Claiborne (LIZ) was on a seven-day 28.6 percent winning streak before losing 16 cents to $5.06 today. Options volume in LIZ Thursday was 10,000 puts and only 180 calls. Typical volume in LIZ is 1,650 contracts. October 4 puts saw the bulk of the flow. 9,600 traded, including a 5,928-contract block at 30 cents when the market was 20 to 30 cents. Open interest is 119 and so the action looks like opening put buying. Oct 4 put on Liz Claiborne is 21 percent out-of-the-money after the stock's recent run higher and some shareholders might be buying premium to protect the risk of downside over the next seven weeks. LIZ was trading for $4.06 before the recent rally began.

Bearish flow also surfaced in Dow Chemical (DOW) and Research In Motion (RIMM).

Index Trading
It was a very quiet day of trading Thursday. 644,000 calls and 792,000 puts traded across the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other cash indexes, which is only 70 percent the average over the past month, according to Trade Alert data. The top index options trades Thursday were in the S&P 500 Index and were similar to the ones highlighted yesterday. With SPX down 14.47 points to 1,204.42 on the session, an investor apparently sold 14,500 December 1,100 puts on the index at $20.70 and bought 21,750 December 900 puts at $4.00. $25.40 was collected on this 2X3 put ratio backspread and that credit will be kept if the position is held through the expiration and the SPX holds above 1,100 (-8.7%). Gains are also possible if SPX makes a very volatile move lower, because the strategist is long three 900 puts and short two 1,100 puts. The worse-case scenario happens if the position is held to the expiration and SPX settles at 900 (-25.3%). At that point, the 900 puts, which were bought, expire worthless and the 1,100 puts, which were sold, are worth $200 apiece. Today's open interest data indicate that yesterday's spread was opening. While it's possible that the position was closed today, it seems more likely that today's flow adds to yesterday's trades.

ETF Action
iShares South Korea Fund (EWY) saw more volume than usual. Shares lost 68 cents to $56.02 and options volume in the product was 6,260 calls and 8,125 puts. The top trades were part of a combo, in which the strategist apparently bought 3,000 September 58 calls at 97 cents and sold 3,000 September 98 puts for 98 cents. In other words, they initiated a Sep 55 - 58 bullish risk-reversal of a one-cent net credit. The combination traded 5000 total and seems to reflect expectations for a rally in South Korea's equity markets before the September expiration, which is two weeks from tomorrow.