Bad News Easily Absorbed 01-18-2011

Cusick's Corner
This market can be characterized as a roaring bull market where bad news can be absorbed and good news sustains the move up. However, really good news starts to raise some red flags, especially for seasoned traders. This market is looking like it will challenge and break the upper barrier, then potentially pullback and consolidate. Option data coming from the Put/Call Ratio is still very bullish, signaling short-term complacency. With the amount of data out this week, we could see some strong action soon. I would not be surprised if there is a burst to the upside, followed by a pullback and longer-term consolidation. Watch the close today. See you After Hours.

Stocks are trading mixed on a busy news day through midday Tuesday. Economic data released early showed the NY Empire State Index of regional manufacturing activity improving to 11.92 in January, which was up from 9.89 the month before and roughly in-line with economist estimates. A separate report released later showed the NAHB Homebuilder Sentiment unchanged at 16 in January, which was also as-expected. Meanwhile, the day's stock news is mixed. Citi (C) is down on an earnings miss and Apple (AAPL) fell on reports Steve Jobs is taking another medical leave of absence. However, Boeing (BA) is up 3.3 percent and the best gainer in the Dow Jones Industrial Average after announcing that delivery of its first 787 Dreamliner is slated for the third quarter. Alcoa (AA) and Caterpillar (CAT) are also helping the Dow and the industrial average has added 65 points through midday. The tech-heavy NASDAQ is up a one point. The CBOE Volatility Index (.VIX) edged up .41 to 15.87. Trading in the options market is active, with 6.3 million calls and 4 puts traded through 12:30pm ET.

Bullish Flow
Options action is picking up in General Electric ahead of earnings. GE, a long-time component of the Dow Jones Industrial Average, is due to release results Friday morning. Shares are off 16 cents to $18.65 and the focus is on the January 19 calls, where more than 35,000 contracts have traded. These calls are 35 cents out-of-the-money and due to expire at the end of the week. When GE reports Friday morning, the contract will have just one day of life remaining and, if GE fails to recapture the $19 per share level, these calls will expire worthless. Consequently, some investors might be liquidating positions. Others might be buying the contract as a cheap way to speculate on the earnings announcement.

Goldcorp (GG) gains 38 cents to $40.94 after gold prices added $6.5 to $1367 an ounce Tuesday. Meanwhile, options volume is picking up in the Vancouver-based gold miner. 22,000 calls and 5,415 puts traded in the name so far. February 41 calls are the most actives and today's volume of more than 13,000 contracts includes two blocks of 6,700 each at $1.65 and $1.66. The market was $1.63 to $1.66 at the time and it appears that one investor bought this hefty bullish position in GG February call options Tuesday morning.

Bearish Flow
Citigroup (C) is under pressure. The financial services giant reported a hefty $1.3 billion profit, but the overall results fell short of Wall Street analyst estimates. Shares lost 32 cents to $4.81. Meanwhile, Citi Jan 5 calls are today's most actively traded contract after more than 266,000 contracts traded. Fifty-eight percent of the total volume traded on the bid, indicating selling pressure. The contract is 19 cents out-of-the-money [OTM] and currently has the most open interest [OI] of any listed options contract today. OI in the Citi Jan 5 call is roughly 2.5 million contracts. Some investors might be liquidating positions as the contract, which expires at the end of the week, falls deeper out-of-the-money.

Apple Computer (AAPL) is down and implied volatility up on reports founder Steve Jobs is taking a medical leave of absence. Shares are off $7.21 to $341.27 and trading in Apple options is very heavy, with 414,000 calls and 268,000 puts traded through midday. January 350 calls, which are falling deeper OTM after today's mover lower, are the most actives. 37,700 traded. Some investors might be liquidating positions ahead of the expiration. However, others might be taking positions on the view that Apple could potentially recover the $350 level when it reports earnings, today after the closing bell. January 33 calls, January 340 calls, January 330 puts, and January 320 puts are actively traded as well.

Unusual Volume
Citigroup (C) options volume is running 2X the average daily, with 1.9 million contracts traded and call volume accounting for 79 percent of the volume, according to data from WhatsTrading.com.

MGIC Investment (MTG) options volume is 4.5X the average daily, with 58,000 contracts traded and call volume representing for 92 percent of the activity.

IBM options volume is running 2X the average daily, with 46,000 contracts traded and call volume accounting for 53 percent of the activity.

Increasing options activity is also being seen in Boston Scientific (BSX), Yum Brands (YUM), and the Semiconductor HOLDRS (SMH).

Implied Volatility Mover
The CBOE Volatility Index (.VIX) is up, even as the stock market averages are showing modest gains Tuesday. The S&P 500 Index (.SPX) has added .64 to 1293.88. Meanwhile, VIX, which tracks the expected volatility priced into SPX options, is up .34 to 15.80. The volatility index normally moves lower when the S&P 500 edges higher. However, VIX lost 10 percent last week and is seeing an uptick ahead of a flood of earnings reports slated for the week ahead as well as key housing data tomorrow and Thursday.