No Trend Reversal Has Materialized Yet 01-10-2011

Cusick's Corner
The market is at excessive levels and in condition of being overbought (with no real selling except for a small amount last week); no trend reversal has materialized yet. There are two ways that this environment can work itself out: 1) by grinding in a range, which the Small Caps (IWM) have been doing or 2) a correction comes into play. A consolidation, like what we have seen in the Consumer and Small Cap names, is already in play and both are lagging the overall market trend. So, if the market firms, then these two markets could lead again since it has been in a longer consolidation. The market is keeping an eye on the EU and Bond Auctions, along with the PIGS. The market is especially focused on Italy and Spain, in turn putting more bearish sentiment on the Euro Currency. If the Euro can break 1.34 the upside, we will see potential momentum (watch Portugal!). See you Midday.

Stocks traded broadly lower early, but finished mixed in a day of relatively quiet market action Monday. The underlying tone of morning trading was cautious, as stock market averages lost ground across the Euro-zone on fears about the widening debt crisis. Portugal was in focus on news the European Central Bank was buying the nation's bonds to help ease some of the credit strains. In the US, there wasn't much news to guide the action. The economic calendar was empty and investors are waiting for fourth quarter earnings reports. The reporting season kicks off with a report from Dow component Alcoa (AA) Monday afternoon. At the end of the day, the tone of trading turned to wait-and-see. The Dow Jones Industrial Average traded in a 102-point range and finished down 38 points. The tech-heavy NASDAQ added 4.6.

Bullish
An interesting three-way spread traded in Fidelity National Services (FIS), a Jacksonville, FL banking and payment technology solutions provider. Shares finished the day up 4 cents to $28.53 and the investor apparently sold 900 January 22.5 puts that expire in 2012 at $1.05 each and bought the Jan2012 30 – 32.5 call spread at $1.20, 900X. The spread traded 1,100X and appears to be a new position. In this strategy, the strategist is selling puts to finance the call spread. It's an aggressive play and one that has risk to the downside beyond the net debit paid because the 22.5 puts are uncovered. If shares tank through 2012, the strategist is on the hook to buy the stock at $22.5 per share.

Bullish trading was also seen in Mylan Labs (MYL), Intel (INTC), and Micron Technology (MU).

Bearish
Marriott (MAR) loses 28 cents to $40.53 and options volume hit 10X the recent average daily after 13,000 puts and 150 calls traded on the hotel operator. The top trades were part of a spread, in which an investor apparently sold 6,000 January 40 puts at 55 cents and bought 4,000 July 37 puts at $2.20 per contract. At the end of the day, 7,745 January 40 puts traded and volume in the July 37s increased to more than 5,000. The action is likely a roll of a bearish position or a hedge out from January to July. Shares performed well in 2010, but have drifted 1 percent lower so far in 2011. An investor might have initiated the put purchase in the January options as a hedge, but is now rolling the position out seven months ahead of next week's options expiration (11 days).

Bearish flow also surfaced in iStar Financial (SFI), First American (FAF), and Omnicare (OCR).

Index Trading
Overall volume in the index market was relatively light Monday, with 436,000 calls and 461,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes. The ten most actives were all on the CBOE Volatility Index (.VIX), which added .40 to 17.54. VIX Feb 40 puts were at the top of the list. 34,655 traded. February 30 calls, February 37.5 calls, March 27.5 puts, March 35 calls, and April 30 calls were the most actives as well. Some volatility traders are now setting their sights on contracts that expire in one month or two rather than the January VIX options, which expire in 8 days.

ETF Action
The top options trades in a relatively slow day of options action Monday were in the iShares Emerging Markets Fund (EEM). Shares lost 49 cents to $46.76 and one investor sells 45,000 February 42 puts at 32 cents and buys 30,000 February 46 puts at $1.21. This February 46 – 42 (1x1.5) put ratio spread, for a net debit of 73 cents, is probably a hedge. That is, an investor was setting up the spread to offset some of the risk of holding shares of companies from the emerging markets. Shares of the Emerging Markets ETF are in the midst of a four-day 3.2 percent skid.