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Stock Market News Update
Thursday, November 11, 2010

thursday update

Thursday saw U.S. stocks fall sharply at the onset of Veterans Day due to worries sparked by Cisco’s gloomy guidance and more turmoil in Europe’s bond markets and could not recover.

With U.S. bond markets closed due to Veterans Day and trading volume expected to be light, much of the early selling was centered in the euro and the tech sector in the wake of Cisco System’s (CSCO) weaker-than-expected guidance.

The early selling comes after the markets erased heavy losses to close higher on Wednesday, narrowly avoiding a three-day slump.

Tech stocks led the way down as tech heavyweight Cisco plunged 16% on its sobering outlook. The company said it expects revenue this quarter to rise just 3% to 5% year-over-year, compared with the 13% jump analysts had been looking for. The guidance overshadowed Cisco’s fiscal first-quarter earnings beat.

CEO John Chambers seemed as shocked as anyone by the dismal guidance. "We hit a couple of air pockets," he said on a conference call with analysts. "We wish we'd seen them coming." So did CSCO shareholders, no doubt, with the stock swallowing a 16.2% loss by the close -- a gut-churning drop that weighed on both the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite.

"The Cisco news is the key driver of market weakness today," said Jim King, president and chief investment officer of National Penn Investors Trust Company. "Our overall view has been that the market has been strong lately, but it's also fragile and vulnerable to disappointment."

CEO John Chambers, a respected voice on the economy, warned of “short-term challenges” in Europe and public-sector spending. Cisco's outlook is often more influential than its earnings because the company builds the equipment needed to make the Internet function and is often seen as a bellwether for the entire technology sector.

"There was a realization that the world didn't end because of Cisco," said David Kotok, chairman and chief investment officer at Cumberland Advisors. "What's really driving stock prices today, yesterday and tomorrow more than anything else, is the central bank policies of very low interest rates for a very long time."

Kotok is referring to the Federal Reserve's policy of quantitative easing -- a $600 billion bond-buying spree the central bank announced last week. The news has sent stocks trending generally upward, as investors welcome the stimulus effect of the policy.

Meanwhile, the Veterans Day holiday meant there were no major U.S. economic reports to consider, but news on the global economy trickled in. Moody's raised its credit rating on China ahead of this weekend's Group of 20 summit, and solid industrial output data from that emerging nation helped offset lingering worries about debt-strapped European nations. The major market indexes pared the worst of their intraday losses by the close, but still finished firmly in the red.

Results for Major Market Indexes

The Dow Jones Industrial Average (DJIA – 11.283.10) finished with a loss of 73.94 points, or 0.65%.

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The S&P 500 Index (SPX – 1,213.54) had a loss, on the day, of 5.17 points, or 0.42%.

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The Nasdaq Composite (COMP – 2,555.52) ended the day with a loss of 23.26 points, or 0.90%.

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The Russell 2000 Index of smaller companies had a gain of 2.71 points, or 0.37%, to settle at 732.16.

Trading Volume

Trading volume was about 7.8 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared with the year-to-date daily average of 8.72 billion.

In spite of the major stock indexes ending Thursday's session with gains, the market's breadth was decidedly negative.

About 19 stocks fell for every 10 that rose on the New York Stock Exchange, while on the Nasdaq, about 17 stocks fell for every nine that rose.

Notes of Interest

The Dow Jones Industrial Average’s (DJIA) ended the session beneath its 10-day moving average for the first time since Oct. 29.

The S&P 500 Index (SPX) maintained a perch above its own 10-day trendline.

The Nasdaq Composite (COMP) spent most of the session staring up at its 10-day moving average, but bounced back to manage a daily finish above this short-term support.

Crude futures briefly set a new 25-month peak of $88.63 today, buoyed by data showing record-setting demand in China. The world's No. 2 oil consumer burned through 8.92 million barrels per day in October, as industrial production in the country soared 13.1%. Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) raised its forecast for world oil demand by 310,000 barrels per day, stoking further optimism in the oil patch. However, strength in the U.S. dollar ultimately limited black gold's gains. Crude oil for December delivery ended the day right where it started, unchanged at $87.81 per barrel.

Gold futures shrugged off strength in the dollar to notch a respectable daily gain. Ongoing anxieties about European sovereign debt -- as well as currency-related concerns ahead of the G-20 summit -- generated a minor wave of safe-haven demand for the malleable metal. By the close, gold for December delivery was up $4, or 0.3%, at $1,403.30 per ounce.

Bonds: Treasury markets, government offices and some banks are closed Thursday in observance of Veterans Day, but all other financial markets are open.

Economic Concerns

G-20 Meeting

The stakes are high at the G-20 meeting, especially as the European sovereign debt crisis and currency tensions once again move to center stage.

"Most important of all is that there is some cooperation and it doesn't degenerate into a kind of cross-border row," said Ken Wattret, chief eurozone market economist at BNP Paribas in London. "It is important that currency wars don't turn into trade wars, at a time of great economic uncertainty."

World leaders including President Obama convened at the G-20 summit in Seoul, South Korea, starting Thursday. Heads of the world's major economies are expected to discuss recent currency tensions, as well as other global economic challenges and regulations.

In Seoul, Treasury Secretary Tim Geithner pushed back against an op-ed in the Financial Times written by former Fed Chairman Alan Greenspan that suggested the U.S. was pursuing a policy of currency weakening.

"The United States of America will never do that," Geithner told CNBC. "We will never seek to weaken our currency as a tool to gain competitive advantage or grow the economy."

Overseas Concerns

Currencies: Wall Street continues to be hurt by its tendency to move in the opposite direction of the U.S. dollar, which renewed its ascent against the euro due to more worries about Europe’s sovereign debt mess. A stronger dollar tends to weigh on exports and commodities. The euro slumped 0.42% to $1.3722.

The euro sank to a one-month low as the markets begin to price in the likelihood of Ireland needing a rescue from the European Union, which promised on Thursday it is “ready to support” the debt-ridden country. The cost to insure the debt of bonds in Ireland, Spanish and Portugal all hit record highs.

Overseas Markets

European Markets closed little changed nearing their close. Britain's FTSE 100 and the DAX in Germany were flat, and France's CAC 40 dipped 0.5%.

Asian Market ended higher. The Shanghai Composite gained 1%, the Hang Seng in Hong Kong ticked up 0.8% and Japan's Nikkei was up 0.3%.

Company Earnings Reports



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Viacom (VIA) revealed a 59% slide in third-quarter profits, but the media company’s non-GAAP EPS of 75 cents beat estimates by 5 cents. Revenue increased by 5% to $3.33 billion, narrowly topping the Street’s view of $3.3 billion. The parent of Comedy Central and MTV also announced plans to sell Harmonix, which developed the very popular “Rock Band” music video game franchise.

Company News and Movements:



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H&R Block (HRB) jumped 4% after the online tax preparer said it is in talks to settle its lawsuit against HSBC (HBC) that alleged a breach of contract. However, H&R said there is no guarantee it will reach a deal.

Jabil Circuit (JBL) and Flextronics (FLX) slumped after Citigroup downgraded both stocks due to concerns they will suffer fallout from the weak guidance out of Cisco, which they rely on for a portion of their revenue.

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Options Movement

Level 3 Communications, Inc. (LVLT)

It's official. After much speculation this week, Level 3 Communications, Inc. (LVLT) this morning confirmed that it's been chosen as a primary content-delivery network for Netflix, Inc. (NFLX). More specifically, the company said it will begin storing Netflix's entire library of more than 20,000 titles starting Jan. 1, and announced plans to double its storage capacity and step up its globally available capacity for content delivery.

In light of the news, the shares of LVLT have skyrocketed more than 14.5% to hover just shy of $1.20, at last check, prompting a slew of bullishly biased options activity. So far today, the security has seen more than 2,100 November 1.50 calls cross the tape – all of which traded at the ask price, implying they were bought. Plus, with no contracts currently docked at this strike, we can assume that the calls were bought to open. In the same vein, the equity's June 2011 1.50-strike call has seen more than 1,200 contracts cross the tape on open interest of fewer than 60 contracts, pointing to new positions. Again, the majority of the calls traded at the ask price, suggesting they were purchased to open.

However, not everyone is employing calls to bet bullishly on LVLT. The security's November 1.50 put has seen 2,365 contracts traded on open interest of zero, indicating that open interest at the strike should swell overnight. Furthermore, 86% of the front-month puts have changed hands at the bid price, suggesting they were likely sold. By writing the November 1.50 puts to open, the sellers are betting LVLT will finish north of the $1.50 level when the front-month options expire, rendering the puts worthless and allowing the traders to retain the initial premium received from the sale.

Meanwhile, on the sentiment front, today's news could shake loose some of the bears on the Street. According to Zacks, LVLT boasts only one "buy" or better rating, compared to 13 "hold" or worse recommendations. In the same vein, short interest accounts of 8.2% of the stock's total float, and would take about two weeks to unwind at the equity's average pace of trading. A wave of upbeat analyst attention or a significant short-covering situation could lure even more buyers to the stock's sparsely populated bandwagon.

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Computer Sciences Corp. (CSC)

Technology titan Computer Sciences Corp. (CSC) was pummeled by put traders on Wednesday, after the firm issued weaker-than-expected quarterly sales figures and trimmed its fiscal 2011 revenue guidance. Citing contract delays at its largest business segment, the company now expects next year's revenue to fall in the $16.5 billion to $17 billion range, compared to its prior guidance for revenue of $16.8 billion to $17.2 billion.

It's no surprise, then, to see that put activity soared to more than nine times the norm yesterday, with roughly 3,300 CSC puts exchanged. Most active by far was the equity's now near-the-money November 47.50 put, which saw close to 1,200 contracts change hands – most of which traded at the ask price, suggesting they were bought. Plus, put open interest at the front-month strike swelled by almost 800 contracts overnight, confirming our theory of bearishly biased buy-to-open activity.

However, yesterday's affinity for near-term puts stands in stark contrast to CSC's broader sentiment backdrop. In fact, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.22 implies that calls more than quadruple puts among options with less than three months to expiration. What's more, this ratio stands just four percentage points shy of a 52-week low, indicating that short-term options speculators have been more optimistically aligned toward CSC just 4% of the time during the past year.

Right out of the gate, the shares of CSC have extended yesterday's retreat, giving up 1.1% to dance around the $47.80 level.

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The following companies also have some impressive options movements:

Dick's Sporting Goods, Inc. (DKS)

Dick's Sporting Goods, Inc. (DKS) this morning was downgraded to "neutral" from "buy" by analysts at Longbow Research, which could be the catalyst behind today's accelerated affinity for puts on the sports apparel retailer. So far today, the security has seen roughly 1,100 puts change hands – more than 13 times its expected daily put volume.

Nearly all of the attention has centered on the stock's near-the-money November 30 put, which has seen more than 1,000 contracts traded on open interest of fewer than 150, hinting at newly opened positions. Furthermore, 81% of the front-month puts have crossed closer to the ask price, suggesting they were bought. By purchasing to open the 30-strike puts, the buyers are betting DKS will retreat south of the round-number $30 level before the end of next week, when November-dated options expire.

However, even before today's negative analyst note the options crowd was ramping up its bearish exposure on DKS, possibly positioning ahead of the firm's turn in the earnings spotlight next week. On the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), the equity has racked up a 10-day put/call volume ratio of 1.27, implying that traders have bought to open more DKS puts than calls during the past two weeks. What's more, this ratio ranks in the 67th annual percentile, indicating that traders are initiating bearish bets over bullish at a faster-than-usual clip.

At last check, the shares of DKS have fallen in parity with the broader equities market, shedding 1.2% to explore the $30.50 area.

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Option Update

At last check, the shares of DKS have fallen in parity with the broader equities market, shedding 1.2% to explore the $30.50 area.

Cisco's and the broader tech sector's sell-off pointed to the need for diversification, said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management in Parsippany, New Jersey, which has about $300 million in assets under management.

"Investors should look to build more diversification in their portfolios, relying not just on normal bellwethers like tech," Mahn said. "I'd recommend people look to places like small-caps, emerging markets and different kinds of bonds."

In the options market, many investors took positions betting on the recovery in Cisco's shares.

"It seems a number of options traders see the new value of the shares as attractive and ripe for harvest," said Caitlin Duffy, options strategist at Interactive Brokers Group.

More than 1.03 million option contracts have changed hands on Cisco Systems, with investors favoring calls over puts in afternoon trade.

Conclusion

After surging to two-year highs last week, Wall Street has run into resistance this week amid skepticism about the Federal Reserve’s stimulus program and renewed trouble on the European sovereign debt front.

Cisco (CSCO.O) lost 16.2 percent to $20.52 after its earnings report. Major indexes plunged shortly after the open, with Nasdaq falling more than 2 percent, but slowly came back as investors viewed Cisco's problems as company-specific.

"This is a recipe for disaster but the fact is, the market is doing pretty well," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"The market is exhibiting considerable strength here, considering the run we've had in the past few weeks, negative news out of Cisco, and the dollar doing well."

In the past, major averages have taken a bigger beating the day after Cisco's earnings disappoint.

Short-term technical indicators suggest the stock market is still in an uptrend, and options action in Cisco reversed earlier bearishness as traders moved to rebuild bullish positions.

"There was a panic sell-off initially (on Cisco's outlook) but people are starting to realize that maybe this is just a Cisco-specific story," Massocca said.


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