FED Stays The Course

Cusick’s Corner
Commentary by Joe Cusick – March 20, 2013 The Fed spoke, their perspective has not changed and into the close the overall market is grinding to new highs of the day. Home Builders, XHB, are really taking off today and that is a huge catalyst for the market. This segment has been a leader and this needs to continue. Watch the Existing Home Sales data tomorrow. Have to run.

Market Recap

Stock market averages moved to session highs shortly after the FOMC concluded its latest meeting on monetary policy. Although there was one dissenter among the Fed members, officials left rates unchanged and left their bond buying program in place, which was widely expected. Stock market averages had already moved into positive territory ahead of the news. With no domestic economic data to guide investors, gains across Asian and European equity markets helped set the table for the early strength on Wall Street. In China, the Shanghai Composite rallied 2.7 percent and, in Tokyo, the Nikkei was up 2 percent. After moving broadly lower yesterday on concerns about the Cyprus bailout, market averages were mostly higher across the Eurozone as well. France’s CAC 40 helped pace the advance after adding 1.4 percent. At that same time, while FedEx (FDX) dropped on its disappointing earnings forecast, the builders are a bright spot on upbeat results from Lennar (LEN) and Toll (TOL). Crude gained $1 to $93.52 in the wake of weekly inventory data, but gold dropped $6.5 to $1605.

Today’s Bullish Trading

Disney (DIS) shares closed up 63 cents to $56.94 and one of the best percentage gainers among 26 Dow stocks moving higher late-Wednesday. On the options front, call volume in DIS is outpacing put activity by a ratio of more than ten-to-one. 57,000 calls and 5,200 put traded today. Two large blocks of Jan 2015 calls are driving the higher call volume. According to a source on the exchange floor, one player bought 25,000 Jan 75 calls on DIS for $1.18 and bought 25,000 Jan 80 calls for 69 cents (both in the longer-dated January 2015). The positions are opening because volume exceeds open interest in both contracts and, if so, the hefty premium buying in upside call options appears to be expressing confidence in Disney for the rest of 2013 and through 2014.

Bullish trading was also seen in Symantec (SYMC), Mattel (MAT), and State Street (STT).

Today’s Bearish Trading

Humana (HUM), the Louisville, KY managed healthcare company, is seeing unusual trading activity Wednesday. The stock closed down 82 cents to $69.45 on a total volume of 2 million shares. Average volume is about 2.5 million shares. Yet, options volume was running 3X the daily average. 21,000 puts and 2,920 calls traded in Humana so far. The largest trade is a 9,665-contract block of April 65 puts for $1 per contract. An investor bought the puts, to open, according to a source on the exchange floor. It’s not clear what is motivating the activity, as there are no obvious headlines on HUM today. The stock is down 14.4 percent since early-February and some investors are possibly buying protective put positions against shares to help hedge the risk of further losses.

Bearish trading was also seen in Gerdau (GGB), Kellogg (K), and Patterson Energy (PTEN).

Index Recap

Implied volatility was broadly lower across the options market Wednesday. For example, CBOE Volatility Index (.VIX) dropped 1.72 points to 12.67. The index, which tracks the implied volatility priced into S&P 500 Options (SPX), was up nearly 23 percent in the previous two trading sessions. Trading was very active Tuesday and, in fact, VIX options set a volume record Tuesday after 1.392 million contracts traded. The activity continued today. Another 1.3 million contracts traded in the VIX pit at the Chicago Board Options Exchange. Today is also the March expiration for the index and this morning’s settlement value (VRO) of 12.64 was the lowest settlement print for the index since April 2007.

Analyzing the ETF Market

Market Vectors Junior Gold Mining ETF (GDXJ) closed down 4 cents to $16.83 amid weakness in the miners today after gold slipped $6.50 to $1605. GDXJ is an exchange-traded fund that holds shares of small and mid-sized gold mining companies. Shares are modestly lower and options volume on the ETF is running more than 2X the daily average. 17,000 calls and 2,300 puts traded so far. The top trade is an 11,100-lot of May 18 calls for 49 cents per contract when the market was 45 to 50 cents. It appears to be a new position because volume exceeds open interest. If so, an investor might have a bullish view on the mining sector, but rather than buying shares, he or she is taking a position in options that give the right to buy (call) GDXJ shares (100 shares per call option) at a set price (strike) for a fixed period of time (expiration).

Joe Cusick
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