The action today established new lows in Tech, QQQ, that broke support, negative number 1. Also, as I noted last week, the Small Caps were lagging the market and at this stage are setting up a potential break of early April lows, IWM below 78, and this is negative. This is a drill on discipline, not a fire drill, in other words this probably is not time to panic and run for exits but it is time to tighten up risk, i.e. cut size or hedge, and if not positioned this would be a time to step back. What I also did not like is that the Bonds, TLT, IEF, and the Dollar, UUP, both broke out today and these are both negatively correlated with equities. There will be elections in the EU over the weekend which could give US policymakers a push for potential intervention if this turn of events is negative. I will be watching the Euro Currency, FXE, to flag issues. Have a good weekend.
Market volatility was up a notch Friday after the Labor Department released a report this morning showing the US economy adding 115,000 jobs in April. Economists were expecting an increase of 162,000. The unemployment rate dipped to 8.1 percent from 8.2 percent and .1 percent more than expected. The focus, however, seemed to be on the poor headline number and investors are now bracing for the uncertain elections in Greece and France on Sunday. Some are worried that potential changes in leadership could undermine recent efforts to cut budget deficits and stem the Eurozone debt crisis. Falling crude oil prices are also making headlines. After losing more than $2 yesterday, crude sank another $4 to $98.56 per barrel Friday. Flight-to-safety is helping to support modestly higher Treasury and gold prices. The yellow metal added almost $10 to $1664.50 an ounce.
Some of the airline names are seeing relative strength today. The sector sometimes moves inverse to oil prices because falling crude lowers jet fuel prices, which represent the largest costs that airlines face. JetBlue Airways (JBLU), for example, is down just 2 cents to $4.73 and options volume on the airliner seems somewhat bullish, as about 11,000 calls and only 520 puts traded on the stock. June 6 calls, which are 26.8 percent out-of-the-money and expiring in six weeks, are the most actives. 6,520 contracts changed hands. Another 2,860 September 6 calls traded on the stock. JBLU was trading north of $6 in early-February before a spike in crude oil, to more than $110 per barrel, seemed to weigh on the sector and send share prices sharply lower. Some investors might be speculating that this week's 6 percent slide in crude might help the airliners, including JetBlue, regain some altitude in the months ahead.
Bullish trading was also seen in Owens Corning (OC), Valero (VLO), and Newell Rubbermaid (NWL).
Arch Coal (ACI) loses another 18 cents to $8.04 and is setting new 52-week lows late Friday. Options on the St. Louis-based coal producer are busy again. 28,000 puts and 9,950 calls so far. The top trades were part of a spread, in which the investor apparently sold 9,000 May 10 puts on the stock at $2.12 and bought 12,000 June 7 puts for 33 cents. This 3X4 put ratio diagonal spread appears to be a roll, or closing out a position in in-the-money May 10 puts to open a new larger position in June 7 puts. ACI is down 75 percent from a year ago and the rolling activity (to the out-of-the-money $7 puts) seems to express concern that the weakness will continue through mid-June.
Bearish trading was also seen in Research In Motion (RIMM), Core Labs (CLB), and Reliant Steel (RS).
CBOE Volatility Index (.VIX) is up 1.40 to 18.96 amid increasing levels of volatility and higher investor anxiety levels Friday. Overall options volume in the VIX pit isn't impressive, at 308K contracts, but it is lop-sided. 223,000 calls and 85,000 puts traded on the index so far. May 20 and June 28 call options on the product are the most actives, with 25,000 and 28,500 contracts traded, respectively. The activity appeared to include some spread trading, in which the investor was possibly selling May 20 calls at $1.45 on VIX to buy June 28 calls for $1.05 and $1.10. If so, the spread trading is possibly rolling out of bullish positions in May and to June, but also up 8 strikes. Keep in mind that VIX options are not based on the spot index but on forward values of the index. For that reason, the May 20 options are based off of a different value relative to the June contracts.
SPDR Energy Fund (XLE) is off $1.45 to $68.45 after many of energy-related names suffered losses following a sell-off in oil. Crude gave up $4 Friday and lost 6 percent on the week. Late options trades on XLE, which is an exchange-traded fund that holds all of the energy-related names from the S&P 500, includes some three-way spread trading, in which 5,000 May 72 calls were apparently sold on XLE at 17 cents to help buy a May 63 - 67 put spread for 61 cents, 5000X. The spread, for a 44 cent debit, traded 10000X on the day and is a bearish play on the energy sector with a max profit if XLE shares fall to $63 or more over the next two weeks. The debit is at risk if XLE holds above $67 and there is additional risk to the upside from holding uncovered call options. A shareholder with a large position in energy names might have initiated the spread to help hedge the risk of additional losses.
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