Wednesday saw U.S. stocks sold off amid speculation that the Federal Reserve is going to announce a smaller-than-expected stimulus package next week.
The Dow Jones industrial average (INDU) was down 112 points, or 1%, with about two hours left in the session. The S&P 500 (SPX) slid 9 points, or 0.8%. The Nasdaq (COMP) also lost 8 points, or 0.3%.
Stocks spiraled lower throughout the day, as investors considered the prospect of a milder-than-expected economic intervention by the Federal Reserve. The Wall Street Journal can take most of the credit for raining on the bulls' parade -- this morning, the newspaper reported that Fed officials next week are likely to unveil a plan to buy "a few hundred billion dollars" in government bonds over the course of three months, compared to the central bank's ambitious March 2009 initiative to purchase $1.75 trillion in Treasury and mortgage bonds. The Journal explained that the Fed is simply trying to keep its options open as the economy lurches unsteadily toward recovery, but traders took the news pretty hard.
In fact, the market wasn't even encouraged by stronger-than-expected reports on durable goods orders and new home sales, with some viewing the solid data as further indication that the Fed will err on the side of modesty. However, the bulls did stage an impressive afternoon comeback, erasing the majority of a 150-point slide on the Dow and eking out a minor gain on the Nasdaq Composite.
Stocks had been climbing since the start of September as investors bet the U.S. central bank would announce another round of asset purchases at the end of its next two-day policy meeting on November 3.
But the excitement over quantitative easing, as the policy is known, waned after a news report raised questions about the size and timing of the Fed action.
"The headlines today are that the Fed's effort to rescue the economy may not be the shock-and-awe campaign many had expected," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. "That's taking some of the fun out of the market."
Many market participants had been expecting the program to range between $500 billion and $1 trillion worth of Treasuries. A report from Goldman Sachs Monday said that the Fed could end up buying $2 trillion worth of assets over the next few years.
Luschini said investors are now expecting the Fed to take a more "measured approach" to quantitative easing. "We're likely to see the Fed doing it in a stair step fashion to see if it's getting traction," he said.
But the toned down expectations helped support the U.S. dollar, which gained ground against the euro, pound and yen. The stronger buck weighed on commodities priced in the U.S. currency. Oil and gold futures both fell over 1%.
“The Fed was out there sending out a message,” said Jay Suskind, senior vice president at Duncan-Williams. “It was a cue for the market that maybe from a commodity and dollar destruction standpoint, those trends went too far.”
Suskind said the selloff was a natural one that came with “no panic,” as investors came to a consensus that expectations for the Fed, as well as Tuesday’s congressional elections and the generally strong earnings season, have been more or less priced into the market.
“People have gotten a little bit complacent in terms of expectations for the Fed’s QE2 to be the [cure] to heal all wounds,” said Michael James, managing director of equity trading at Wedbush Securities. “Traders knew at some point those questions would come up. It was just a question of when.”
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 11,126.28) finished with a loss of 43.18 points, or 0.39%.
The S&P 500 Index (SPX – 1,182.45) also had a loss, on the day, of 3.19 points, or 0.27%.
However, the Nasdaq Composite (COMP – 2,503.26) ended the day, with a gain of 5.97 points, or 0.24%.
The Russell 2000 Index of smaller companies had a loss of 2.70 points, or 0.38%, to settle at 704.23.
Most of the Dow's 30 components took a hit, led by Merck (MRK), McDonald's (MCD) and Alcoa (AA). The index's best performers were Bank of America (BAC) and American Express (AXP).
The Nasdaq Composite significantly outperformed the broader markets and even closed slightly higher as tech stocks like eBay (EBAY) and Dell (DELL) benefited from Broadcom's (BRCM) earnings beat and bullish outlook.
The buying spilled into other tech stocks, including Marvell Technology (MRVL) and BlackBerry maker Research in Motion (RIMM).
Volume was light, with about 7.8 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below the year-to-date moving average of 8.75 billion.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 2 to 1, while on the Nasdaq, eight stocks fell for every five that rose.
Notes of Interest….
• The Dow Jones Industrial Average (DJIA) was off nearly 149 points at its session low, but the blue chip barometer pared the worst of its intraday deficit to close on a loss of 43.2 points, or 0.4%.
The Dow found support today near the 11,020 neighborhood, which is home to its rising 20-day moving average.
• The S&P 500 Index’s (SPX) erased most of its losses by the close, giving up just 3.2 points, or 0.3%. The SPX continues to consolidate near the 1,180 neighborhood; this round-number region hasn't been breached on a daily closing basis since Oct. 20.
• The Nasdaq Composite’s (COMP) was the only index to completely shake off its midday blues, with the COMP bouncing back to end on a gain of nearly 6 points, or 0.2%. In the process, the COMP logged its first daily close north of 2,500 since April 29.
• Crude futures fell in sympathy with stocks today, as expectations for a relatively modest stimulus effort from the Fed propped up the U.S. dollar. An unexpected weekly decline in domestic gasoline inventories helped crude oil recover from its intraday nadir of $80.52 per barrel, but the greenback's surge kept the dollar-denominated commodity under pressure through the close. Crude oil for December delivery shed 61 cents, or 0.7%, to end at $81.94 per barrel.
• Gold futures: also settled lower, as shifting expectations for the Fed's next policy decision diminished demand for the popular inflationary hedge. With traders now anticipating a less aggressive intervention from the central bank, the dollar's gain was gold's loss. By the close, gold for December delivery shed $16, or 1.2%, to settle at $1,322.60 an ounce.
• Bonds: Prices on U.S. Treasuries fell, pushing yields higher. The benchmark 10-year note yield rose to 2.7% from 2.64% late Tuesday. The government is expected to auction off $35 billion of 5-year notes on Wednesday.
• With the uncertain outcomes of the U.S. elections and a Fed meeting next week, traders positioned themselves for more volatile markets. The CBOE Volatility index .VIX rose 2.4 percent and was up for the third consecutive day.
Durable Goods Orders
New orders for long-lasting U.S. manufactured goods rose more than expected in September as bookings for civilian aircraft surged, but fell when transportation equipment was excluded, a government report showed on Wednesday.
The Commerce Department said durable goods orders increased 3.3%, the largest gain since January, after a revised 1.0% drop in August. Economists polled by Reuters had expected orders to increase 2.0% last month after a previously reported fall of 1.5%.
Orders excluding transportation, however, unexpectedly fell 0.8% in September after increasing 1.9% the prior month. Economists had expected a 0.5% gain.
U.S. Mortgage Applications
U.S. mortgage applications for home purchasing and refinancing rose last week as consumers sought to take advantage of near-record low interest rates, data from an industry group showed on Wednesday.
While the uptick bodes well for the housing market, which has been showing signs of improvement, demand has been tepid, reflecting the inability of many consumers to take advantage of rock-bottom rates.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes purchase and refinance loans, increased 3.2% for the week ended Oct. 22. The four-week moving average, which smooths the volatile weekly figures, was up 1.4%.
It was only the second time in eight weeks activity rose. Michelle Meyer, senior U.S. economist at BofA Merrill Lynch in New York, said demand remains sluggish despite the rise. "This implies that the soft trend in home sales should persist amid high unemployment, tight credit and depressed consumer confidence," she said.
Meyer said "underwater" mortgages — where the amount owed on the mortgage exceeds the value of the home — are one of the biggest banes of the homeowners.
This negative equity makes many of them unqualified for home loan refinancing and prevents some from selling. "The refinancing index has increased notably, but still less than to be expected given incredibly low mortgage rates," she said.
The MBA's seasonally adjusted index of refinancing applications increased 3.0%.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.25%, down 0.09 percentage point from the previous week. Interest rates were also below their year-ago level of 5.04%.
Last week's rate matched that of the week ended Oct. 1, which was the second lowest level in the survey, which has been conducted weekly since 1990. A record low of 4.21% was reached in the week ended Oct. 8.
If home loan refinancing continues to climb it will bode well for the flailing U.S. economy as this activity typically encourages an increase in consumer spending.
By lowering monthly mortgage payments, lower rates may also help some homeowners avoid default and foreclosure if their credit is good enough.
The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, rose 3.9%.
The housing market has been struggling since the expiry of popular home buyer tax credits earlier this year.
To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.
The tax credits pulled sales forward and activity dropped after the expiry.
Encouraging news this week indicate this payback may be easing. The National Association of Realtors on Monday said sales of previously owned U.S. homes in September increased 10% from August.
More insight into the state of the housing market will emerge on Wednesday when the Commerce Department releases September new home sales data.
The MBA said fixed 15-year mortgage rates averaged 3.67%, down from 3.74% the previous week and the second lowest on record, with the lowest being 3.62% two weeks prior. Rates on one-year adjustable-rate mortgage, or ARMs, decreased to 7.07% from 7.17%.
New Home Sales
Sales of new U.S. single-family homes rose more than expected in September, while prices rose and the supply of homes on the market was the lowest in 42 years, a government report showed on Wednesday.
The Commerce Department said sales rose 6.6% to a 307,000-unit annual rate from an unrevised 288,000-unit pace in August. Analysts polled by Reuters had forecast new home sales rising to a 300,000-unit pace last month. Sales were down 21.5% compared to September last year.
In currencies : The dollar continued to strengthen against the euro, the British pound and the Japanese yen.
The Fed’s apparent attempt to back away from “shock and awe” helped the dollar bounce back against most of its major rivals. The Australian dollar tumbled 1.1% against the greenback, while the dollar rose to 81.72 yen, from 81.50 yen late Tuesday in New York, and the euro fell to $1.3763, from $1.3852.
European Markets also tumbled. Britain's FTSE 100 dropped 1%, the DAX in Germany lost 0.7% and France's CAC 40 declined 0.9%.
Asian Markets ended their session mixed. Japan's benchmark Nikkei index rose 0.1%, and the Hang Seng in Hong Kong lost 1.9%. The Shanghai Composite ended down 1.5%.
Company Earnings Reports
• Sprint Nextel (S) revealed a deeper-than-expected third-quarter loss of 30 cents a share, sparking a 9% selloff in its stock. However, the No. 4 U.S. wireless provider’s revenue growth of 1.4% to $487 million topped estimates and it lost fewer postpaid contract customers than had been expected. It also added 644,000 total wireless subscribers.
• Whirlpool (WHR) beat the Street with a non-GAAP profit of $2.22 a share, compared with forecasts for EPS of just $1.75. The big appliance maker’s sales rose 0.5% to $4.52 billion, narrowly topping the Street’s view of $4.5 billion. Citing expected economic turbulence, Whirlpool cut its 2010 industry shipment view from 5% to just 3%, but kept its 2010 EPS outlook.
• SAP (SAP) took a 5% hit after posting a weaker-than-expected third-quarter operating profit of 716 million euros. The German software maker also declined to hike its full-year financial guidance.
• Jones Group (JNY) tumbled 22% after posting a weaker-than-expected non-GAAP profit of 54 cents a share due to soaring cotton prices. Analysts had expected EPS of 62 cents. After sliding 2.1 percentage points last quarter, the parent of Nine West warned its gross margins could fall by another percentage point this quarter due to higher costs.
• Procter & Gamble’s (PG) third-quarter profits slid 6.8% due to higher prices, but its EPS of $1.02 still exceeded estimates by 2 cents. The maker of Crest toothpaste and Gillette razors said its revenue rose 6.1% to $20.12 billion, coming in shy of the Street’s view of $21.27 billion.
• ConocoPhillips (COP) more than doubled its third-quarter profits and posted stronger-than-expected non-GAAP EPS of $1.50. The third-largest U.S. oil company didn’t disclose revenue figures.
• Comcast (CMCSA) posted an 8.2% decline in third-quarter profits, but its non-GAAP EPS of 31 cents beat the Street. The No. 1 U.S. cable operator said its revenue rose by a stronger-than-expected 7.3% to $9.49 billion. Comcast lost 275,000 basic video subscribers, but added 249,000 Internet and 228,000 phone customers.
Company News and Movements:
• JPMorgan Chase (JPM) acquired a majority stake in $6 billion Brazilian hedge fund Gavea Investimentos. The purchase, made through JPMorgan’s Highbridge Capital hedge fund, increases the bank’s footprint in one of the hottest markets in the world. JPMorgan didn’t disclose a price tag on the move, but reports said it paid $270 million for a 55% stake and an option to buy the remaining 45%.
• CommScope (CTV) reached a deal to be bought by private by private-equity giant the Carlyle Group for $3.9 billion. The $31.60-per-share all-cash deal represents a 36% premium on the communication cable maker’s closing price from Friday. CommScope also posted a stronger-than-expected non-GAAP profit of 62 cents a share on revenue of $822 million.
Barnes & Noble, Inc. (BKS)
On Tuesday, Barnes & Noble, Inc. (BKS) unveiled the new version of its Nook e-reader. The new device sports a color, 7-inch touch screen and Internet capabilities, and will be available on Nov. 19 for $249. The new and improved Nook is BKS' latest effort to set itself apart from Amazon.com, Inc.'s (AMZN) best-selling Kindle.
Technically speaking, BKS has been struggling lately, with the shares range-bound in the $15 to $17 region since August. During this time, BKS' 32-week trendline, which is located just above $17, has reinforced the upper rail of this range. Meanwhile, for the past few weeks, BKS has been testing support at $15, and is now hovering just below this level, around $14.95.
Option players have adopted a bearish attitude toward the struggling stock, as evidenced by BKS' put/call open interest ratio (SOIR) of 0.92, which ranks in the 77th annual percentile. In other words, near-term traders have been more skeptical of the shares just 23% of the time during the past 12 months.
Turning to BKS' November open interest configuration, we find that peak put open interest resides at the in-the-money 17 strike. Meanwhile, the 17 strike also houses peak call open interest, with another substantial accumulation of calls at the 16 strike. Given BKS' lackluster technical performance of late, both 16- and 17-strike calls are out of the money. As November expiration draws closer, an unwinding of these out-of-the-money calls could pressure the book stock even lower.
Arch Coal, Inc. (ACI)
Arch Coal, Inc. (ACI) will step onto the earnings field before the opening bell on Friday, Oct. 29. According to Thomson Reuters, analysts, on average, are expecting the coal concern to report a third-quarter profit of 37 cents per share – more than double the company's year-ago earnings of 16 cents per share. However, the firm has a wishy-washy history in the earnings spotlight, falling short of the Street's per-share profit predictions twice in the past four quarters.
That somewhat shaky record could be why one options speculator is taking the directionless road less traveled to bet on ACI's post-earnings trajectory. Yesterday morning, symmetrical blocks of 1,000 December 25 puts and 1,000 December 27 calls – both marked "spread" – changed hands for the ask prices of $1.56 and $0.71, respectively, suggesting they were bought. In other words, the investor constructed a long strangle on ACI for a net debit of $2.27 per pair of options.
By constructing this play, the trader can make money as long as the shares of ACI make a monstrous move before the options expire – direction doesn't matter. More specifically, as long as the stock backpedals south of the $22.73 level (put strike minus net debit) or rallies north of the $29.27 level (call strike plus net debit), the investor stands to profit on the play. Nevertheless, even if ACI remains glued to the $25 level through expiration, the most the strategist can possibly lose is limited to the $2.27 paid to establish the strangle.
At last check, the shares of ACI have fallen in tandem with the broader equities market, giving up 2.9% to linger in the $24.60 region.
Office Depot, Inc. (ODP)
Office Depot, Inc. (ODP) stepped into the earnings limelight this morning, reporting a surprise third-quarter profit – as promised earlier this week – thanks to cost cuts and hefty tax and interest-expense benefits. However, the shares of ODP have followed the broader equities market into the red – meaning the office supply chain's recent crop of call buyers may be ruing their bullish bets.
Ahead of the company's earnings release, ODP sported a hefty 10-day call/put volume ratio of 61.94 on the International Securities Exchange (ISE), indicating that traders during the past two weeks have bought to open almost 62 calls for every put on the equity. What's more, this reading ranks in the 98th percentile of its annual range, suggesting that speculators on the ISE have rarely initiated bullish bets over bearish at a quicker tempo.
Attracting the most attention has been the near-the-money November 5 strike, which has seen call open interest swell by about 2,400 contracts during the past couple of weeks. As such, the 5 strike is now home to peak call open interest in the front-month series, with about 10,000 contracts in residence. However, not all of the Street harbored such lofty expectations for ODP's post-earnings price action. According to Zacks, the security boasts just three "buy" or better ratings, compared to 14 "hold" or worse recommendations. From a contrarian standpoint, though, this lack of enthusiasm could translate into gains for the shares, should the analyst crowd start to capitulate to the bullpen via upgrades.
Right out of the gate, the shares of ODP have given up 1.1% to explore the $4.70 neighborhood. Furthermore, any upward momentum could run into a roadblock in the overhead $5 region, as the aforementioned accumulation of bullish bets at the November 5 strike could act as short-term resistance for the equity.
The following companies had some impressive options movement :-
Cardinal Health (CAH)
The shares of Cardinal Health Inc. (CAH) spiked early Tuesday on rumors that the company was the target of an acquisition. However, the company quickly issued a statement that it's "not in discussions with any party regarding an acquisition of Cardinal Health."
Looking ahead, the company is slated to report first-quarter earnings on Thursday, Oct. 28. Analysts are expecting a profit of 53 cents per share, down from its year-ago profit of 54 cents per share. Historically, the company has surpassed the consensus estimate in each of the past four quarters.
Options trading was brisk on the security yesterday, as more than 54,900 contracts crossed the tape. This surge in volume was more than 71 times the stock's average daily trading volume of 767 contracts, according to data from WhatsTrading.com. Furthermore, traders were feeling optimistic, as 77% of the volume changed hands on the call side.
The International Securities Exchange (ISE) has seen a rise in call trading. During the past 10 trading sessions, 97 calls have been purchased to open for every one put purchased to open. This ratio is higher than 99% of all the readings taken during the past year, pointing to rising optimism.
In addition, the put/call open interest ratio (SOIR) for CAH comes in at 0.36, as call open interest nearly triples put open interest among options slated to expire in less than three months. This ratio of puts to calls is lower than 96% of all those taken during the past year. In other words, short-term options players have been more optimistically aligned toward the shares only 4% of the time during the past 52 weeks.
On the other hand, Wall Street has a slight bearish bias. According to Zacks, the stock has earned nine "buy" ratings and 11 "holds."
Technically speaking, the shares of CAH are up roughly 2% since the beginning of the year. The security has recently bounced off support at the 30 level, but has fallen into a sideways trading range near its 10-week and 20-week moving averages.
Ford Motor (F)
On Tuesday, Ford Motor Co. (F) reported a 70% jump in third-quarter profit on rising sales of pickup trucks and other vehicles in its core North American market. The earnings, which totaled $1.7 billion, marked the sixth consecutive quarterly profit for the only U.S. automaker to avoid filing for bankruptcy last year. Third-quarter revenue totaled $29 billion, down from $30.3 billion in the 2009 quarter, which was prior to Ford's sale of Volvo. Excluding Volvo from the 2009 figure, revenue rose $1.7 billion in the 2010 period. Earnings per share came in at 43 cents, compared with 29 cents a year earlier. Excluding items, Ford earned 48 cents per share, exceeding the average estimate of analysts of 38 cents per share.
Options players jumped on the security, as more than 286,500 contracts crossed the tape. This surge in volume was more than double the stock's average daily trading volume of 106,966 contracts, according to data from WhatsTrading.com. In addition, approximately 71% of the volume changed hands on the call side.
Meanwhile, there is a slight bearish bias among options players on the ISE. The 10-day put/call volume ratio comes in at 0.48, which is higher than 51% of all those taken during the past year, pointing to a slight increase in put trading.
What's more, the SOIR for F comes in at 0.71, which is also higher than 51% of all those taken during the past 12 months. Elsewhere, we find that short sellers have flocked to the stock. During the past month, the number of F shares sold short increased by 3.5% to 289 million. This accumulation of bearish bets accounts for 8.7% of the company's total float. An unwinding of these pessimistic positions could fuel a continued rally.
Wall Street is currently smitten with the shares. According to Zacks, the stock has earned nine "strong buys," three "holds," and one "strong sell."
From a technical perspective, the shares of F are up more than 43% since the beginning of 2010. Since putting in a near-term low at the 11 level in late August, the stock has steadily climbed along the support of its 10-day and 20-day moving averages.
Procter & Gamble (PG)
The Procter & Gamble Co. (PG) announced before the open this morning that its fiscal first-quarter earnings dropped 6.8%, as lower margins were offset by strong volume gains. For the quarter, earnings came in at $3.08 billion, or $1.02 per share, compared with $3.31 billion, or $1.06 per share, a year ago. Revenue climbed 1.6% to $20.12 billion. Organic sales increased 4%, as volume jumped 8%. The company in August projected 97 cents to $1.01, below analysts' then-expectations, with revenue up 1% to 2% and organic sales climbing 3% to 5%. Gross margin fell to 51.8% from 52.6% on higher commodity costs.
For the second quarter, the firm forecasts earnings of $1.05 to $1.11 per share, with revenue up 2% to 4% and organic sales -- a closely watched measure that excludes acquisitions and foreign exchange impacts -- rising 3% to 5%. Analysts' average estimates were for earnings of $1.11 and 1% revenue growth to $21.27 billion.
Ahead of the earnings report, options players flocked to the stock's options, as more than 56,700 contracts crossed the tape. This surge in volume was more than double the stock's average daily trading volume of 19,835 contracts, according to data from WhatsTrading.com. In addition, traders were feeling somewhat bearish, as 58% of the volume changed hands on the put side.
The ISE reports an increase in call trading recently. During the past two trading weeks, 2.5 calls have been purchased to open for every one put purchased to open. This ratio of calls to puts is higher than 79% of all those taken during the past 52 weeks.
On the other hand, there are still signs of skepticism. The SOIR for PG comes in at 1.06, as put open interest outnumbers call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 85% of all those taken during the past 52 weeks. In other words, short-term options players have been more pessimistically aligned toward the shares only 15% of the time during the past 12 months.
Wall Street remains smitten with the shares. According to Zacks, the stock has earned 16 "strong buy" ratings, one "buy," and six "holds."
Technically speaking, the shares of PG are up 3% since the start of the year. The equity staged a nice rally from its February 2009 low into resistance at the 64 level. However, since February 2010, the stock has been trapped between resistance at the 64 level and support at the 59 level.
**Bullish pre-earnings action in Avon Products (AVP). Shares are up 26 cents to $33.19 and 17,600 calls traded in the name, or 3X the recent average daily.
**Bullish flow detected in AmerisourceBergen (ABC), with 6826 calls trading, or 7x the recent average daily call volume in the name.
**Bearish activity detected in Corning (GLW), with 74791 puts trading, or 15x the recent average daily put volume in the name.
**Increasing options activity is also being seen in Monsanto (MON), Marvell Tech (MRVL), and Sprint (S).
In recent sessions, investors reduced their bets on the size and timetable of the Fed's potential purchases of Treasury debt. The Wall Street Journal furthered those expectations after reporting the Fed hoped to avoid a "shock and awe" approach.
"People are using that as a reason to take profits after what has been a very strong couple of months for equities," said Tim Holland, co-portfolio manager of Aston/TAMRO Diversified Equity Fund in Alexandria, Virginia.
The rise in volatility suggests growing caution among investors. TD Ameritrade chief derivatives strategist Joe Kinahan said investors have been hedging gains through use of options in equity index and exchange-traded funds.
"They don't necessarily want to be out of their current positions," Kinahan said. "By buying protection and hedging recent gains against their current positions, investors now have the ability to pull the cord on the downside."
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