Bears Come Out of Hibernation 03-16-2011

Cusick's Corner
If you are a Bear then you have come out of hibernation. The data, PPI and Housing, were worse than expected. Earlier today an EU atomic expert made a statement that the situation in Japan is “out of control”. The headlines and data put this market on alert and rightfully so. This data concerns me because the consumer is going to have to be able to absorb these price increases, opening up the potential that they won't. This also put the Fed on notice that the Hawks are swooping in and rate hikes are fathomable sooner than later. Strategically, spread trading is the way you need to trade to mitigate the volatility and headline risk. On a personal note, I have had the honor of previously spending time in the very same area in Japan where this disaster is continuing to unfold. That experience gave me memories that I have cherished all my life. I made some friends who showed me a kindness and a will to achieve that of which I have never experienced before in my life. The people of Japan will rebuild and bounce back. My thoughts and prayers go out to all who are dealing with this tragedy.

Disappointing domestic economic news and worries about Japan's nuclear crisis are weighing on Wall Street Wednesday. Data was in focus early after a report showed Housing Starts plunging 22.5 percent to an annual rate of 479,000 in February. Economists were looking for a decline to 575,000. Separately, the Labor Department reported that the Producer Price Index [PPI] jumped 1.6 percent in February. Economists were expecting an increase of just .6 percent. Meanwhile, Japanese officials have ordered workers to suspend work at the troubled nuclear plant, raising additional concerns about the dangerous levels of leaking radiation that are likely to affect the population and activity within the third's largest economy. Japan is already reeling from last week's devastating earthquake and tsunami. Tokyo's Nikkei was able to rebound 5.7 percent overnight, but stock market averages are broadly lower across Europe and America Wednesday. The Dow Jones Industrial Average is now down 175 points and the tech-heavy NASDAQ has lost 39.5 through midday. The CBOE Volatility Index (.VIX) rallied 4.45 to 28.77. Trading in the options market is very active and becoming much more defensive, with 5.7 million calls and 6.7 million puts traded through 12:15pm ET.

Bullish Flow
Baidu.com (BIDU), the Chinese Internet company, is seeing relative strength and increasing options volume today. 42,000 calls and 24,000 puts have traded in the name so far. Shares are trading up 66 cents to $122.89 and the March 125 calls are the most actives. More than 18,000 traded. Open interest is 13,059. Another 9,584 March 130 calls have changed hands. Both the March 125 and 130 calls are out-of-the-money and expire at the end of the week. It looks like some short-term speculators are taking positions and anticipating a move higher in the stock before the expiration. The reason for the bullishness isn't clear. There is no news on the stock and the next earnings release is due late-April.

Lubrizol (LZ), which rallied 27.7 percent Monday on news Warren Buffett's Berkshire Hathaway is buying the company, is up 16 cents to $133.93 today and options volume is running 4X the average daily. About 10,000 calls and 1,450 puts traded in the name. June 135 calls are the most actives and it looks like some investors are paying 60 cents for the contract. September 135 calls are busy as well. The reason for the interest in LZ 135 calls isn't clear because the deal values the company at $135 per share in cash and, at that price, $135 calls expire worthless. Some of the activity might be closing trades.

Bearish Flow
Avon Products (AVP) trades down 19 cents to $26.57 and put options volume is running 5X the normal levels. 4,430 traded, which compares to just 230 calls. April 25 puts have traded 2,250 contracts and are the most actives. 80 percent traded at the Ask. Similar action is being seen in the April 26 puts. Implied volatility is up 7 percent to 37 and some investors might be taking defensive positions to hedge Avon shares, perhaps on concerns about sales to customers overseas.

iShares Korea Fund (EWY) puts are busy for a second day. As noted in yesterday's midday report, March 54 puts are the most actives on the ETF Tuesday after more than 24,000 traded. Shares are down 35 cents to $57.35 Wednesday and the focus is now on the March 55 puts. 27,000 traded, including a morning buyer of 24,000 at 16 cents per contract. These puts are “cheap” at only 16 cents because the contract is more than 4 percent out-of-the-money and expires at the end of the week. An investor looking for additional losses for South Korea's equity markets over the next two days might have initiated today's bearish trade.

Unusual Volume
Xerox (XRX) options volume is running 8.5X the (22-day) average, with 40,000 contracts traded and put volume accounting for 98 percent of the volume.

iShares Japan Fund (EWJ) options volume is 6X the average daily, with 427,000 contracts traded and put volume representing for 59 percent of the activity.

Peabody Energy (BTU) options volume is running 2.5X the average daily, with 37,000 contracts traded and call volume accounting for 67 percent of the activity.

Increasing options activity is also being seen in FedEx (FDX), Cameco (CCJ), and Exelon (EXC).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is rallying. After gaining 15 percent yesterday, the market's “fear gauge” is up 3.45 to 27.77. VIX hit a morning high of 28.98 and its best levels since July. The volatility index is rallying, as global equity markets have come under pressure and fear is spreading across global equity markets worldwide. Although Japan's Nikkei rallied 5.8 percent overnight, Nikkei futures are currently down nearly 6 percent, suggesting that those gains might be lost when the trading resumes Thursday.