Sentiment
Stocks are under pressure for a second day. After losing 187 points Monday, the Dow Jones Industrial Average opened a bit higher with help from better-than-expected housing and inflation data. A report released an hour before the opening bell on Wall Street showed housing starts increasing to an annualized rate of 532,000 homes in May, which was up from 454,000 the month before and better than economist forecasts of 485,000. Building permits, a better gauge of future activity, rose to 518,000 from 494,000. Economists had expected an increase of 14,000.
Meanwhile, a separate report on inflation came in well below estimates. The Labor Department reports that its Producer Price Index [PPI] edged up .2 percent in May, which follows a .3 percent increase the month before and falls well below economist forecasts of .3 percent. Excluding food and energy, the core PPI fell .1 percent. Economists were looking for a .1 percent increase.
However, a third piece of data, released a bit later, showed a seventh consecutive decline in industrial production, which slid by 1.1 percent in May. Economists were expecting a .7 percent decline.
In the end, the day's economic data didn't seem to ease the investor anxiety levels that surfaced when stocks sank Monday, and a Tuesday morning reversal sent the Dow Jones Industrial Average back into the red by midday. There doesn't seem to be one specific catalyst for the decline, and the weakness is spread across a variety of sectors. Alcoa (AA), BofA (BAC), Disney (DIS), and GE are the biggest losers in the Dow Jones Industrial Average.
Twenty-five Dow stocks are lower, 5 higher, and the industrial average was down 85 points heading into the final 45 minutes of trading. The CBOE Volatility Index (.VIX) is up 1.69 to 32.50. Trading in the options market is picking up heading into the quadruple witch expiration, with 6.7 million puts and 7 million calls trade so far, a ratio of .96 (compared to a 22-day average of .77).
Bullish Flow
Summer doldrums? Not everyone thinks so. The CBOE Volatility Index (.VIX) is up 1.58 to 32.39 and VIX August 50 call option is the most actively traded index contract Tuesday. One player bought 25K for 75 cents (against a smaller position in VIX futures.) Two other blocks (10K and 8,800) were also bought this morning for 75 cents. Looks like some investors are looking for a substantial increase in volatility by the August expiration and are buying the August 50s. The contract is 61.9 percent out-of-the-money and so it would take a substantial spike in the VIX for these calls to make a profit at the August expiration (63 days).
Keep in mind, however, that summer months don't always translate into less volatility. Notice the nearby chart. July has been a seasonally strong period for the CBOE Volatility Index. Two years ago, VIX nearly tripled from mid-June to mid-August.
Bearish Flow
Bearish traders are active in storage device maker Western Digital (WDC) Tuesday. Put volume is running 30x the normal, with 11,000 traded vs. 1.000 call options. Order flow analysis indicates that customers are buying to open positions in July 22.5 puts and paying 65 to 85 cents. Shares are slightly lower near $24.50. Earnings expected after July expiry, so buyers may be positioning for pre-announcement or some other downside catalyst in WDC.
Implied Volatility Movers
Matrixx Initiatives (MTXX) shares plunged 68 percent to $6.15 after the FDA warned the company failed to adequately disclose risks associated with some nasal medications. The unexpected announcement sent implied volatility in MTXX options surging, up to 265 from about 35 the day before.
Implied volatility is also higher in McMoran Exploration (MMR), WDC, and the S&P 500 (SPY). Implied volatility is lower in BofA (BAC), Best Buy (BBY), and Casey's (CASY).
