Spotty Selling Into Close 01-11-2011

Cusick's Corner
The market could not garner any steam into the close and the spotty selling raised some red flags. The bid was present throughout the day, but earnings are going to be one catalyst that has not been in the markets over the past couple of sessions. Watch Large Cap stocks that are going to deliver earnings this week, specifically INTC and JPM. The subcurrent is still very positive in this consolidation, so do not get too caught up in the headlines. Watch the MBA Mortgage Purchase Index due out at pre-market and then Crude at 10am ET. See you Midday.

Major averages finished with modest gains following a day of quiet trading Tuesday. The table was set for an early advance on Wall Street after Euro-zone equity markets marched higher on news Japan indicated it might buy debt of some troubled nations, which could help lower interest rates and ease credit strains across the continent. A 1.6 percent gain in France's CAC 40 and 1.5 percent increase in Spain's IBEX Index helped pace the advance. Meanwhile in the US, the focus is shifting to earnings. Alcoa (AA) traded 1 percent lower, even as the company reported earnings that topped Street estimates. Supervalu (SVU) also sank on earnings, but Sears Holdings (SHLD) moved higher. On the economic front, the only stat of the day was a report that showed November wholesale inventories down .2 percent. Economists were looking for an increase of .1percent. The market showed little reaction to the data. Instead, the Dow Jones Industrial Average traded in a narrow 68-point range and finished up 35 points. The tech-heavy NASDAQ added 9 points.

Bullish
Applied Materials (AMAT) shares gained 31 cents to $14.08 and options on the semiconductor equipment maker were busy Tuesday. Total volume hit 4X the average daily after 32,000 calls and 2,400 puts traded in the name. Trading was brisk in the January 14 calls, with 25,000 changing hands on the session. February 14 calls saw interest as well. The action hints at speculative activity and might be a play on Intel's (INTC) earnings on Thursday.

Semiconductor Equipment and Materials International [SEMI] is also due to release its monthly book-to-bill ratio before the January 22 expiration (on January 20). Some investors might be initiating bullish trades in AMAT January call options in anticipation of positive industry news (Intel earnings and book-to-bill ratio) over the next 10 days.

Bullish trading was also seen in HSBC (HBC), LiveNation (LVY), and Hasbro (HAS).

Bearish
Options volume picked in Alaska Airlines (ALK) Tuesday. Shares lost 74 cents to $62.21 and options volume included 3,660 calls and 375 puts. The top trades included a February 65 – 70 call spread, apparently sold at $1.10, 768X. This spread traded 1700X and appears to be new positioning in both contracts. If so, it's not necessarily a bearish bet. Instead, it's a wager that ALK will hold below $65 per shares through the February expiration and these calls will expire worthless.

Bearish flow also surfaced in Icici Bank (IBN), Collective Brands (PSS), and L and L Energy (LLEN).

Index Trading
The PHLX Oil Service Index (.OSX) saw increasing options action after crude oil prices bubbled higher Tuesday. Crude oil traded up $2.07 to $91.32 a barrel. OSX, which is a cash-settled index that tracks the price action of Halliburton (HAL), Baker Hughes (BHI) and other leading oil drillers, added 6.10 to 247.22. Options volume in the index included 1,042 calls and 43 puts. January 240 calls were the most actives. Some players might have been closing out positions ahead of next week's expiration. OSX has risen 44 percent since August and these 240 calls are now in-the-money.

ETF Action
An interesting trade surfaced in the Financials Select Sector Fund (XLF) today. Shares finished up 7 cents to $16.24 and a block of 20,000 February 17 calls traded at the 21-cent ask price. Meanwhile, a block of 20,000 February 15 puts traded at the 15-cent asking price. These two blocks of options were part of a massive February 15 – 17 strangle purchase, according to a source on the American Stock Exchange [AMEX]. In this trade, the strategist is not making a directional bet. Instead, they appear to be betting that volatility in the financial sector will increase between now and February. The trade can generate profits if the XLF makes a volatile move in one direction or the other. The key is for the magnitude of the move to be sufficient enough to offset the negative impact from time decay.