Divergence Started to Form Midday 01-28-2011

Cusick's Corner
The day was confirming a trend down day. This was determined not by just price action but also the fact that volume was high. I saw this divergence start to form into the midday and then the price and volume action in equities confirmed this short-term bearishness in the afternoon. Keep an eye on the Advance/Decline volume line. If this indicator turns bearish then the potential for a deeper correction could be in the works. Keep an eye on the unrest in Egypt which has sparked interest in the commodities, specifically Oil, not because Egypt produces oil but the unrest could start to spill over in other Arab states that may not be happy with the current leadership (i.e. the Saudi's). This situation could create opportunities for producers outside of that region, PXD/EP. Have a great weekend see you Midday.

Volatility picked up on Wall Street Friday, as disappointing earnings news, a weaker-than-expected GDP number and increasing political unrest in the Arab world sent stocks sharply lower. Microsoft (MSFT) lost 4.2 percent and is the biggest loser in the Dow Jones Industrial Average heading into the final half hour. Shares opened lower Friday after the software maker's earnings report released late Thursday fell short of some expectations. Ford Motor (F) and Amazon.com (AMZN) are also suffering post-earnings losses. On the economic front, data released early showed Gross Domestic Product increasing at an annual rate of 3.2 percent in the fourth quarter, which was below economist estimates of 3.7 percent. Separate data showed the University of Michigan Consumer Sentiment Index up to 74.2 in January, from 72.7 in mid-January and better than the 73.2 reading that economists had expected. Yet, stocks are broadly lower and volatility is higher. Some attention has shifted to problems in Egypt and escalating tensions between anti-government protesters and the Mubarak administration. The concern is about instability in the region and the potential impact on financial markets in other areas like Europe and the Middle East. The Dow Jones Industrial Average is down 178 points. With 15 minutes left to trade, the NASDAQ has given up 69 points.

Bullish
Nabors Industries (NBR) is trading down 39 cents to $23.89 and some players seem to view the weakness as an opportunity to enter bullish trades on the oil and gas driller. 11,000 calls and 1,125 puts have traded in the name so far. The February 25 calls, which are now $1.11 out-of-the-money with three weeks of life remaining, are the most actives. More than 6,000 traded. February 24 and 26 calls are seeing some interest as well. Investors might be taking bullish positions and looking for good news to lift shares before the contracts expire. The company releases earnings on February 15 and just a few days before the expiration.

Bullish trading was also seen in Symantec (SYMC), Celldex Therapeutics (CLDX), and Nuance Communications (NUAN).

Bearish
Glaxo SmithKline (GSK) is down $1.12 to $36.34 on talk the company has stopped the development of a medical device used to treat insomnia (per Briefing). Shares are lower and options volume is 13X the recent average daily. 24,000 puts and 2,400 calls have traded on the pharmaceutical giant, a ratio of 10-to-1. The February 37.5 puts have traded 16,700X and are the most actives. February 39 puts are seeing interest as well. It looks like some investors are opening new positions, as volume exceeds open interest in both contracts. Implied volatility is up 13 percent to 25, as some investors appear concerned about additional losses in GSK in the weeks ahead.

Bearish flow also surfaced in Genco Shipping and Trading (GNK), Waste Management (WM), and Cephalon (CEPH).

Index Trading
The CBOE Volatility Index (.VIX) is surging on worries about earnings, the economy, and problems abroad. VIX has been trading in a narrow range since mid-December, but is up 3.79 to 19.94 and within striking distance of 20 for the first time since early-December. The rally in the VIX is being driven by increasing interest in index puts. 575,000 puts and 245,000 calls have traded on the S&P 500 Index (.SPX) today. Since VIX tracks the expected volatility in the S&P 500, it is rallying Friday because investors are showing increasing interest in portfolio protection.

ETF Action
Powershares Bullish Dollar Fund (UUP) is trading up and calls are busy Friday. Shares, which track the performance of the dollar against a basket of other foreign currencies, opened at $22.39 and are now trading up 14 cents to $22.49. Options volume includes about 47,000 calls and 720 puts. March 23 calls are the most actives. 23,850 traded and 83 percent traded at the asking price. Another 15,100 March 24 calls changed hands (75 percent ask). Since most of the volume is trading on the ask side of the bid-ask spread, it appears that buyers are dominating the action in these out-of-the-money calls and looking for the dollar perform well from now through mid-March. UUP has not been performing well lately, however, and is down 3.7 percent since mid-January.