TODAY’S NOTABLE MARKET ACTION

• As we noted yesterday, the Vix spiked again and the call buyers in the options are sitting pretty now.   The VIX jumped over 12% on the day to just under 28.

VIX – CBOE Volatility index – Monday’s leap in the reading of Wall Street’s fear gauge was accompanied by one of those occasions when investors were left flat-footed during the trading day as stocks flashed from green to red. It was highly reminiscent of the trading pattern in 2008 and earlier this year when, try as they might, investors couldn’t shake off the recession blues no matter how economists tried to spin data points. Monday’s 10% rise in the Vix has been followed today by a further 0.5% rise to 24.43 only one week after the market volatility reading tried to dip below 20, effectively wiping risk aversion off the radar altogether. Today, however, one option investor appears to be looking for a substantial return to volatile sessions and sold at-the-money put options to back his bet that the Vix will return to a mid-30 reading by the end of 2009. Using the December contract some 24,000 call options at the 35 strike were bought for 79 cents, partially funded by the sale of almost 7,500 put options expiring at the same time for a higher 1.90 premium. One possible explanation for the actions of this investor, who expects the value of the puts to fall and the price of the calls to increase, is Tuesday’s return to deteriorating consumer confidence. With more than two-thirds of output origination from consumers, this trader is concerned about further market weakness ahead.

• The dollar surge continued and it took oil to the woodshed.  Oil collapsed 3%.

• Dr. Copper fell over 2% on the day as investors begin to worry about the sustainability of the economic recovery.

• Goldman added Chicago Bridge and Iron to their conviction buy list and upped their price target to $26.

• Citigroup upgraded AK Steel to a buy and upped their price target to $21.

• Citi also upgrade Target Corp. to a buy with a $61 price target.

• Brazil’s Bovespa declined 4.5% on the day and extended the decline to 11% since the trader tax was initiated.  Watch out below if Congress tries to pass something similar here.  The bottom would almost certainly come out of the market if we try to crack down on price discovery.

• In the credit markets we saw broad deterioration.  Tim Backshall at CDR has the details:

The names having the largest impact on IG are United Parcel Service Inc. (-1bps) pushing IG 0.01bps tighter, and American International Group, Inc. (+75.63bps) adding 0.48bps to IG. HVOL is more sensitive with Home Depot Inc. pushing it 0bps tighter, and American International Group, Inc. contributing 2.06bps to HVOL’s change today. The less volatile ExHVOL’s move today is driven by both United Parcel Service Inc. (-1bps) pushing the index 0.01bps tighter, and Valero Energy Corp. (+13.5bps) adding 0.13bps to ExHVOL. [We also note that CIT ended the day 100bps wider as the revolver extension seemed to be ignored by credit markets as nothing but a snub to Icahn; also the GMAC/RESCAP moves were dramatic after they got their $2.9bn TLGP issue off – we note that the GMAC-RESCAP spread recahed 1350bps recently (dramatically wider in a quick period) and we suspect that this 550bps plus rally in RESCAP is as much as about a busted compression trade as it is any sentiment improvements – look for a 500-600bps differential for any entry as a fllor level for a decompression trade].