S&Ps Continue to Challenge 2-Year Highs 02-15-2011

Cusick's Corner
There's not much commentary to add, the market is long and there has not been a move to the upside that would be considered the pop that we have been looking for the last few weeks. We see that the S&Ps continue to challenge 2 year highs, just below a 100% retracement of the ‘09 lows of 667, which has kept the trading bias strongly in to the hands of the longs. If there is to be some move to the upside with momentum then we want to see the major indices break to new highs, 1335 on the S&P. Pressure could continue on Oil, USO, and Euro Currency, FXE, which could also signal that some potential weakness in the market is upon us. Also the DOW, DIA, formed an inside day Doji, showing some indecision and potential reversal signal for this blue chip index. Let's see if this indecision continues to spread to the other major indices. See you After Hours.

Market action is sluggish following a disappointing reading on retail sales Tuesday. The data, released before the opening bell, showed total sales increasing .3 percent in January. It was the seventh consecutive increase in monthly retail sales, but the headline number fell short of economist estimates of .5 percent. Separate data showed the NY Empire State Index increasing to 15.43 in February, which was up from 11.92 last month and a bit shy of expectations (15.5). A third report showed business inventories up .8 percent in December, which was .2 percent more than expected. At the end of the day, the data didn't offer much reason to cheer and some market watchers worry that consumers might now be consuming less due to a recent increase in food and energy prices. The World Bank is warning today that food prices rose 29 percent during the past year and are approaching “dangerous” levels that could promote additional political instability worldwide. On Wall Street, the overall tone of trading is cautious. The Dow Jones Industrial Average is down 33 points and the NASDAQ has lost 6. The CBOE Volatility Index (.VIX) edged up .44 to 16.39. Options trading volumes are running about the typical levels, with 5 million calls and 3.7 puts traded through 12:30pm ET.

Bullish Flow
Gap Stores (GPS) shares are trading up $1.24 to $22.71 on news Edward Lambert's ESL Partners has taken a 5.8 percent stake in the retailer. Shares are up and options volume is running 3X the average daily, with about 22,000 calls and 3,000 puts traded in Gap Stores so far. February 23 calls, which expire at the end of the week, are the most actives. 5,650 changed hands. March 23, June 18, June 21, and June 25 calls are seeing busy trading as well.

The top equity options trade so far today is in Citigroup (C). It was a block of 100,000 September 6 calls traded at 12 cents each. The position was sold as part of a ratio spread. In this strategy, the investor bought 50,000 September 5.5 calls at 22 cents and sold twice as many of the September 6 calls. With shares around $4.90, they initiated the spread for a 2-cen t credit (22 – 12 – 12) and are possibly looking for Citi to move towards $6 by the September expiration. There is additional upside risk to this spread, as only half of the September 6 calls (which were sold) are covered by the September 5.5 call options.

Bearish Flow
A large three-way spread went off in the SPDR 500 Trust (SPY) this morning. The SPYders are trading down 38 cents to $133.05 and the strategist sold 70,000 February 130 puts at 15 cents. They also bought 70,000 March 130 puts at $1.33 and sold 70,000 March 121 puts at 33 cents. Therefore, they apparently sold February 130 puts to buy the March 130 – 121 put spread at $1, and paid 85 cents for the three-way spread. It likely rolls a position out from February to March ahead of the expiration at the end of this week.

Freeport McMoran (FCX) shares are down $1.52 to $54.62 after being mentioned cautiously in a Stansberry Research newsletter. In options action, the focus is on March 55 puts. 15,500 traded through midday. 58 percent hit at the ask and open interest is 6,239. Some investors might be initiating new positions in those FCX puts after the newsletter publisher made a bearish call on the stock.

Unusual Volume
DELL options volume is running 6X the average daily, with 149,000 contracts traded and put volume accounting for 54 percent of the volume, according to data from WhatsTrading.com.

United Technologies (UTX) options volume is 11.5X the average daily, with 103,000 contracts traded and call volume representing for 99 percent of the activity.

Williams Companies (WMB) options volume is running 2.5X the average daily, with 81,000 contracts traded and call volume accounting for 63 percent of the activity.

Increasing options activity is also being seen in JDS Uniphase (JDSU), NYSE Euronext (NYX), and Honeywell (HON).

Implied Volatility Mover
DELL options are actively traded and implied volatility is moving up ahead of its earnings, which are due after the close of trading today. Shares of the computer maker are off 21 cents to $13.88 and today's volume includes 68,000 calls along with 81,000 puts. The overall tone of trading seems somewhat cautious heading into the news and implied volatility is up 6 percent to 37.