Cusick's Corner

The challenge is on the bulls -- the S&Ps are trading below 1430. We are resting right at the lows of September, 1421, which could be critical territory to hold. This action to the downside and the lack of upside momentum is a flag in itself that warrants respect even if we do not get downside momentum in the next few sessions. One sector that I am looking for some potential leadership to the upside is Finance, XLF. While there has been a pullback this week, the Financials have been exhibiting much greater relative strength. See you Midday.

Market Recap

Stock market averages were down sharply for a second day as concerns about earnings and the economy weighed on investor sentiment Wednesday. Alcoa (AA) shed 4.6 percent and was the Dow's biggest loser after the aluminum-maker posted better-than-expected EPS and revenue numbers after the closing bell yesterday, but the results represented a decline from year ago levels and investors seemed unimpressed with the company's forecast for future aluminum demand. At the same time, Chevron Texaco (CVX) lost 4.2 percent and was the second biggest loser in the industrial average after the oil giant issued a disappointing interim third quarter profit forecast. The economic calendar remains light, but the Fed's Beige Book was released this afternoon and, in the report, officials noted modest economic expansion. The only other economic data today showed Wholesale Inventories up .5 percent in August and mostly in-line with expectations. The data didn't seem to have much market impact and the main catalyst for the two-day slide appears to be pre-earning jitters. After a 110-point setback Tuesday, the industrial average lost another 129 points. The NASDAQ dropped 13.3.

Today's Bullish Trading

Safeway (SWY) might be a name worth watching tomorrow to see if the grocery chain can snap a string of disappointing earnings reports. The stock has moved lower on the day following each of the past three earnings releases for an average daily loss of about 5 percent. Shares of the grocery store chain ticked 4 cents higher to $16.29 in active trading 10 million shares today ahead of the results, which are due out tomorrow morning. Meanwhile, options volume on Safeway was 4X the daily average. 25,000 calls and 6,300 puts traded in the name, a ratio of four-to-one. October 17 calls, which are 4.3 percent out-of-the-money and expiring 8 days after the company reports results, were the most actives in SWY today. 8,480 contracts traded. December 17 calls and October 18 calls were the next most actives and implied volatility in SWY options was up 14.5 percent to 51.5 ahead of the news.

Bullish trading was also seen in Supervalu (SVU), Barnes and Noble (BKS), and Nokia (NOK).

Today's Bearish Trading

MetroPCS (PCS) continues to see heavy trading. The stock rallied to 52-week highs of $14.16 last Tuesday after the company announced plans to combine with T-Mobile. The news triggered a flurry of speculation that Sprint might enter into the fray, because the company had previously been courting both PCS and T-Mobile in the past. However, PCS shares lost 47 cents to $12.04 today on unconfirmed reports that Sprint said it was holding back on any counterbids for MetroPCS. PCS slid on the news and trading was heavy in the options on the stock. 106,000 calls and 40,000 puts traded in the name. More than 22,800 October $12 calls traded. The top trade was a 3000-lot at 25 cents when the market was 25 to 35 cents. Some investors were possibly selling these now at-the-money calls on the view the upside is limited for the stock on the heels of today's news. October options expire at the end of next week.

Bearish trading was also seen in MBIA (MBI), Finisar (FNSR), and Veeco Instruments (VECO).

Index Recap

CBOE Volatility Index (.VIX) strayed from its normal pattern today. VIX often moves higher when the market falls. Yet, today, the S&P 500 Index (.SPX) lost 8.92 points to 1,432.56 and VIX, which tracks the expected volatility priced into S&P 500 Index options, also dropped .08 to 16.29. This behavior might be technical, as the volatility index had jumped 14.2 percent over the past two days. The lack of movement in VIX might also be due to the lack of any real hedging activity lately (SPX put buying lately). About 426,000 puts and 245,000 calls traded in the SPX pit today, which is a bit lop-sided in the favor of puts, but not very high total volume for the product.

Analyzing the ETF Market

iShares FTSE China 25 Index Fund (FXI), which is an ETF that holds a basket of leading Chinese names, was up 24 cents to $35.26 and options volume in the product today was 114,000 calls and 35,000 puts. Almost three-quarters of the call activity were in the November 37s. The flow included a buyer of 13,000 contracts for 35 cents on the electronic International Securities Exchange. An investor bought the position, to open, according to data from the ISE. At the end of the day, 82,700 November 27 calls traded on FXI against 27,350 in open interest. The contract is nearly 5 percent out-of-the-money and expiring in 37 days. Some investors might be taking positions on the view that Chinese equity markets might perform well in the weeks ahead.

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