Stocks Slide in All Sectors

Cusick’s Corner

Stock market averages were lower through midday and suffered additional losses in afternoon trading Wednesday. The tone of trading was cautious early after ADP reported that the US economy added 158K private sector jobs in March, which was below expectations of 197K and the disappointing number comes ahead of key jobs data from the Labor Department Friday. Separately, ISM Services Index, which is a gauge of economic activity outside of manufacturing, fell to 54.4 for March and below expectations of 55.5. European markets also slumped, led by losses in Spain and Italy.

Then, prices in some key commodities came under fire. Crude dropped ~$2.66 to $94.53 and Gold gave up another $18 to $1558. Reports that the US had sent missile defense systems to Guam seemed to add to anxiety levels, as US Defense Secretary Chuck Hagel cited a “real and clear” danger from North Korea. At the end of the day, concerns about the domestic economy and tensions between the US and North Korea seemed to be the primary factors weighing on sentiment. The Dow lost 111 points and suffered its biggest drop in 5 weeks. The NASDAQ gave up 36.3 points.

Today’s Bullish Trading

Ann Taylor (ANN) shares bucked the bearish trend and finished up 21 cents to $28.90 Wednesday. Options on the New York-based apparel retailer were busy as well. Total volume was 5.5X the daily average, as 11,000 calls and 3,770 puts traded in ANN. May 30 calls were the most active. 6,980 traded against just 122 in open interest. May 31 calls were busy as well. 2,427 changed hands vs. 90 in open interest. It’s not clear what motivated the relative strength in the stock or higher call activity in Ann Taylor today. There were no obvious company headlines. The stock has underperformed in 2013 and is down 14.6 percent year-to-date. Some investors might view the decline as an opportunity for bullish trades. But, rather than buying shares outright today, they’re taking positions in options that offer the right to buy (call) the stock for a set price (strike) through the set date (expiration).

Bullish trading was also seen in Magic Jack (CALL), Altera (ALTR), and Endo Health Solutions (ENDP).

Today’s Bearish Trading

Live Nation (LYV), the Beverly Hills, CA entertainment company, dropped 26 cents to $11.82 today and options volume on the stock was 8X the daily average. 12,000 puts and 280 call options traded in Live Nation options Wednesday. A block of 3,257 LYV May 10 puts traded for 25 cents per contract when the market was 15 to 25 cents. 8,749 contracts changed hands total against zero open interest. May 11 calls were the second most active in the name. 2,690 traded against 7,164 in OI. It’s not clear what motivated the increased activity in LYV today, as there were no news items on the ticker. The company announced last week that it was selling its Foxwood Theatres. Earnings are expected early-May.

Bearish trading was also seen in Applied Materials (AMAT), Dean Foods (DF), and Officemax (OMX).

Index Recap

Implied volatility [IV] was broadly higher across the options market and volume was up as well. CBOE Volatility Index (.VIX), which tracks the IV of S&P 500 Index (.SPX) options, jumped 1.43 points to 14.21. The Russell 2000 Small Cap Implied Volatility Index (.RVX) rose 1.25 to 18.35, IV on the Dow (as measured by VXD) rose 1.11 to 12.67 and, lastly, NASDAQ IV (.VXN) gained .92 to 14.94. At the same time, overall volumes picked up from the slow pace seen Monday and Tuesday as well. 805,000 calls and 859,000 puts traded on SPX, VIX and other cash index products. VIX April 14 puts and 28 calls were the most active index contracts of the day.

Analyzing the ETF Market

A large block of puts traded on the iShares Emerging Markets Fund (EEM) Wednesday. In fact, it was the largest block of options traded across the market since March 18. Shares finished down 49 cents to $41.83 and a 178,163-contract block of June 42.5 puts traded on the ETF at $1.48 per contract. Open interest in the strike is 182,999 and the third largest in EEM options. An investor might have liquidated a bearish position after a 5.7 percent year-to-date slide in the emerging markets fund. If so, they collected a hefty $26 million in premium on that one position. An investor with a large position in shares of companies from the emerging markets might have opened the trade to hedge the portfolio. So they might be taking the hedge off.

Joe Cusick
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