Market Has Broken Two Critical Levels 10-03-2011

Cusick's Corner
The market into the Midday has broken two critical levels, 1120 and 1102 on the S&Ps, which has the bears in complete control and new lows are potentially in sight. Now if we do get a bounce, let's say to 1150 on the S&Ps, the shorts could come under squeeze pressure, but I have seen enough action to say that the downside and the EU headlines that continue to come out have been worse than the stories out of a bad Greek wedding. Be careful playing the short side, there is too much cash on the sidelines, so watch this pullback and when or if we get to new lows, i.e. 1050 on the S&Ps, there could be some great bargains. This is how I am looking at this market. See you After Hours.

Stock market averages are under water despite better-than-expected economic data. A report released in morning trading Monday showed the ISM Index of manufacturing activity up to 51.6 in September, from 50.6 the month before and better than the 50.5 that was expected. Meanwhile, Construction Spending rose 1.4 percent in August. Economists were looking for a decline of -.5 percent. Yet, although stock market averages ticked higher on the data, domestic news continues to take a backseat to events in Europe. The euro fell to 8 month lows against the buck and to decade lows on the yen amid ongoing concerns about the European Debt Crisis. European stock market averages also finished with losses. Volatility on the other side of the Atlantic has once again spilled over onto US shores. Through midday, the Dow Jones Industrial Average is down 130 points and the tech-heavy NASDAQ lost 43. CBOE Volatility Index (.VIX) added another 1 point to 43.96. Overall options volume is active, with 4.5 million calls and 5.2 million puts traded across the exchanges through 12:45pm ET.

Bullish Flow
Yahoo (YHOO) sees relative strength and options on the Internet company are actively traded after Bloomberg reported that Alibaba's Chairman Jack Ma said he is "very interested" in buying the company. Yahoo is up 37 cents to $13.54. Options volume on the stock through midday includes 61,000 calls and 16,000 puts. October 15 calls, which are now 10.8 percent out-of-the-money and expiring in 18 days, are the most actives. 8,680 traded. Weekly (10/7), November and January $15 calls are actively traded as well. Some players are likely buying upside calls on hopes that some sort of official takeover announcement will lift shares beyond $15 in the months ahead. No actual announcement has been made, however.

Sangamo Biosciences (SGMO) is trading down $1.10 to $3.25 after the biotech announced that is has halted the study of a diabetic treatment after the drug failed to meet targets in a Phase 2 study. SGMO has tumbled 45.8 percent from $6 per share just two weeks ago (9/16). Options order flow on the stock is interesting, as 4,310 calls and 800 puts traded in the name. Typical volume through midday is less than 800 contracts. November 3 calls are the most actives. 1,110 traded. November 6 and January 9 calls are seeing interest as well. Moreover, with about 70 percent of the overall call volume trading at the ask, it appears that some call buyers view the weakness in SGMO as an opportunity for bullish options trades on the stock.

Bearish Flow
General Electric (GE) is down 37 cents to $14.85 and one of twenty-nine Dow stocks losing ground today. Only Walmart shares are moving higher in the Dow. GE shares are now making a run back towards a 52-week low of $14.72 set on 9/12. Meanwhile, options volume in GE includes 159,000 puts and 67,000 calls. Typical volume through midday is about 83,000, according to Trade Alert data. The action includes a buyer of 34,000 October 12 puts at an average of about 15 cents per contract. The position looks opening and a bearish short-term play on GE. Oct 12 puts on the stock are 18.5 percent out-of-the-money and expire in 18 days.

SPDR Basic Materials Fund (XLB) is trading down 38 cents to $28.98 and options volume on the ETF through midday includes 24,000 puts and 3,720 calls. One strategist sold 7,000 October 32 puts on the fund and bought 15,000 December 27 puts at $1.74. It looks like a roll down five strikes and out two months. After a 28-percent slide in shares since July 21, the strategist is probably selling a position in Oct 32 puts, which are $3 in-the-money, to open a new position in the Dec 27s, which are $2 out-of-the-money.

Unusual Volume
SPDR Oil and Exploration ETF (XOP) options volume is running 6X the (22-day) average, with 102,000 contracts traded and put activity accounting for 76 percent of the volume.

Eastman Kodak (EK) options volume is 3X the average daily, with 98,000 contracts traded and call volume representing 54 percent of the activity.

CREE options volume is running 3X the average daily, with 66,000 contracts traded and call volume representing 95 percent of the total volume.

Increasing options activity is also being seen in AMR, Focus Media (FMCN), and Western Digital (WDC).

Implied Volatility Mover
iPath S&P 500 VIX Short-term Futures (VXX) is up $1.82 to $55.19 on a volatile start to the month of October. Shares, which track short-term market volatility through futures contracts, have now rallied 136 percent since July. Options volume on the VXX through midday includes 27,000 calls and 31,000 puts. The top trade is a 6,250 contract block of January 2013 $15 puts on the fund, which was bought at $1.10 per contract. The strategist is possibly taking a position on the view that extreme levels of market volatility will ease through 2012 and into 2013. VXX recorded a 52-week low of $19.88 on July 7. Therefore, a move to $15, or 72.8 percent below current levels, might not be entirely out of the realm of reality.