Market Frothy Like a Cappuccino 02-09-2011

Cusick's Corner
As I noted yesterday this market is a little frothy with S&P March futures at 1320, a pullback could be warranted. Many traders are monitoring if critical, short-term support 1317 holds on the March S&P futures into the After Hours, which would be a good sign for the bulls because this has been the normal behavior of the bid -- buy on the dips. What would be concerning is if the market does pullback with no consolidation to key moving averages, i.e. the 20 MA. Commodities are also starting to firm in the face of a pullback in the Buck and continued headlines from latest Suez Strike, so worth keeping an eye on that dynamic. The 10 yr auction has gone well which sends a message that the yield is attractive enough to warrant such buying. See you After Hours.

After seven days of gains, the Dow Jones Industrial Average opened lower Wednesday despite strong earnings from two of its components. Disney (DIS) shares are up 5.8 percent and Coca Cola (KO) added .7 percent after the two companies reported profits that beat Street views. Yet, Exxon Mobile (XOM) and Chevron (CVX) are the biggest losers in the Dow, even after crude oil added 15 cents to $87.09 a barrel. Eighteen other Dow stocks are under water and the industrial average is off 30 points midday. The tech-heavy NASDAQ lost 11.8 ahead of Cisco's (CSCO) earnings, due out after the closing bell. Some attention is also on Federal Reserve Chairman Bernanke. The head of the Fed is facing tough questions on Capitol Hill Wednesday. So far, there has been relatively little market reaction to the testimony. Instead, profit-taking seems to be the order of the day. Meanwhile, the CBOE Volatility Index (.VIX) is up .60 to 16.41 and options volume is running about the typical levels, with 4.4 million calls and 3.7 puts traded through 12:05pm ET.

Bullish Flow
A number of the exchanges are seeing bullish trading Wednesday after NYSE Euronext (NYX) was halted and trading was also suspended in Deutsche Boerse in overseas action. The two companies are in merger talks, according to several different media reports. The news comes the same day that the London Stock Exchange made a $3.2 billion bid for the Toronto Stock Exchange. The news triggered a flurry of activity across a number of different names in the sector, including NASDAQ OMX Group (NDAQ), which was itself the product of a recent merger. NDAQ shares touched a new 52-week high and are up $1.48 to $27.32. Options volume hit 10X the average daily, with 14,000 calls and 625 puts traded.

Meanwhile, the Intercontinental Exchange (ICE), which also reported earnings Wednesday morning, shares are up $4.52 to $122.74. Options volume is running 3X the recent average daily, with about 5,000 calls and 860 puts traded on the ticker so far. February 125 calls are the most actives. 1,635 traded and 79 percent traded at the ask, suggesting investors are buying positions and looking for the rally to continue through the February expiration, which is at the end of next week. February 126 calls are trading predominantly at the offer as well.

Bearish Flow
Sara Lee (SLE) lost 15 cents to $17 and investors are showing interest in put options on the food company today. The top trades are blocks of 5,880 (X2) March 16s at 30 and 35 cents. The market was 20 to 30 cents at the time. So, it appears that a buyer was initiating the trade. 17,400 contracts now traded. March 17 puts are seeing interest as well. The action comes the day after the company reported earnings. In addition, shares of Sara Lee have been under pressure since January 26 when the company announced that it would split into different business units rather than try to sell itself. Today's put buyers might be bracing for additional weakness in shares during the weeks ahead.

One of the biggest options trades so far today is in the iShares Emerging Markets Fund (EEM). Shares are down $1.04 to $45.53 on a down day for international equity markets. Meanwhile, one investor initiates a sizeable June 46 – 36 (1X2) put ratio spread for a $1.86 net debit. In this trade, the investor bought 10,973 June 46 puts at $2.90 and sold 21,946 June 36 puts at 52 cents. It might be a straight bearish bet or a hedge, as the spread offers a maximum payout if shares fall to $36, or 20.9 percent, through the June expiration.

Unusual Volume
Disney (DIS) options volume is running 5.5X the average daily, with 107,000 contracts traded and call volume accounting for 68 percent of the volume, according to data from WhatsTrading.com.

Atmel (ATML) options volume is 12.5X the average daily, with 56,000 contracts traded and call volume representing for 96 percent of the activity.

JC Penney (JCP) options volume is running 2X the average daily, with 30,000 contracts traded and put volume accounting for 70 percent of the activity.

Increasing options activity is also being seen in Teck Resources (TCK), Macy's (M) and Computer Sciences (CSC).

Implied Volatility Mover
CBOE Holdings (CBOE), the parent company of the Chicago Board Options Exchange, is rallying along with other names in the space after a merger between London and Toronto stock exchanges was announced and speculation surfaced that NYSE Euronext and Deutsche Boerse might merge (see NDAQ comment in Bullish Flow). CBOE shares have added $1.64 to $26.11 and options volume is 8X the average daily, with 10,000 calls and 3,330 puts traded on the exchange. In addition, CBOE earnings are due tomorrow morning. Implied volatility is up 43 percent to 40 ahead of the results.