Market Focused on Tomorrow's Data 04-13-2011

Cusick's Corner
The market bounced on the close but it was not the type of conviction that I would like to see. If you look at the volume it was far less than when sellers took control yesterday (especially at the close of that session). This choppy action early into the earnings cycle is alleviating some of the market's overbought nature that we talked about last week. What I do not like is the fact that Finance and Oil are both lagging. Plus in the case of Oil, it's pulling back and in a meaningful fashion. The long-term trend in both segments is up, there is short-term pressure that I just cannot ignore and will be something to watch for opportunity. Watch support, 1305 on the S&P June Futures, to see if it is challenged and then the bid reengages. Tomorrow's calendar has Claims and PPI due out pre-market. The PPI data could add further volatility to the market if commodity prices are still on the rise, exacerbating the inflation debate. See you Midday.

Stock market averages finished with modest gains on a quiet day of trading Wednesday. Economic data was in focus early after a report showed Retail Sales up .4 percent in March, which was .1 percent less than expected. Meanwhile, Business Inventories rose .5 percent in February, which was also below expectations of .8 percent. On the earnings front, Dow component JP Morgan (JPM) reported a quarterly profit of $1.28 per share and twelve cents better than Street estimates. Although shares traded higher on the results early, JPM fell in morning trading and finished the day down .8 percent. The Federal Reserve's Beige Book, which noted generally improving economic conditions last month, got some attention in afternoon trading. President Obama's deficit plan was also unveiled Wednesday afternoon. The plan cuts $12 trillion in spending over four years. However, the market showed relatively reaction to the day's events. At the closing bell, the Dow Jones Industrial Average had added just 7 points. The tech-heavy NASDAQ was up 16.7.

Bullish
Dell Computer (DELL) shares rallied and options were busy on the computer maker Wednesday. Shares moved higher early after a Wall Street analyst said that the company's CFO recently made upbeat comments about corporate IT spending and expects upside projections to first quarter earnings estimates. DELL gained 72 cents to $15.42 on the positive commentary. Options volume rose to 3X the average daily. 79,000 calls and 16,000 puts traded in Dell today. The May 16 calls, which are now 3.8 percent out-of-the-money with five and half weeks of life remaining, were the most actives. Volume approached 30,000 contracts. April 15 and 16 calls were heavily traded as well.

Bullish trading was also seen in Home Depot (HD), Fairchild Semiconductor (FCS), and MGM.

Bearish
Big Lots (BIG) shares gained 30 cents to $43.54 and an interesting four-way spread surfaced in the retailer today. In midday trade, the investor apparently bought 6,750 April 37.5 calls at $5.50 and sold 6,750 April 32.5 puts at a nickel. They also sold 6,750 May 40 calls at $4.10 and bought 6,750 May 35 puts at 35 cents. The action looks like a roll, or closing out a bearish risk-reversal in April to open a new one in May at a higher strike price. BIG shares have been rallying since Bloomberg reported on February 7 that the company is considering putting itself up for sale. A shareholder might have initiated the risk-reversal or "collar" to protect gains in shares. Now, by rolling the position out one month, they have adjusted their collar.

Bearish flow also surfaced in Sysco (SYY), Crown Holdings (CCK), and Louisiana Pacific (LPX).

Index Trading
The CBOE Volatility Index (.VIX) saw interesting trading activity today. As noted in the midday report, the April and July 30 call options both traded 100,000X. While this seemed to be rolling of long calls from April to July, it was actually part of a four-way spread. In this trade, the investor bought 50,000 May 24 calls and sold 100,000 May 30 calls. They also sold 50,000 July 22.5 calls and bought 100,000 July 30 calls. This looks like a roll, or closing out a 1X2 ratio spread in May to open a new one (backspread) in the July calls. VIX finished the day down .17 to 16.92 and this ratio spread offers its best pay out if the volatility index makes a dramatic spike through the July expiration.

ETF Action
SPDR Technology Fund (XLK) added 16 cents to $25.84 today and options volume hit 2X the average daily, driven by straddle sales. One investor sold 10,000 May 26 straddles (puts and calls) at $1.08. 5,000 more were sold at $1.08 a bit later. More than 15,000 traded in both the May 26 puts and the May 26 calls. Since volume exceeds open interest in both contracts, this looks opening. If so, it's not really a bullish or bearish play. It's a bet that shares will trade around $26 through the May expiration. XLK is the exchange-traded fund that holds all of the information technology names from the S&P 500.