Canary in the Coal Mine 04-28-11

Cusick's Corner
The Base Metals sector (take DBB ETF for example) can be used as the canary in the coal mine. These metals -- Copper, Zinc and Aluminum are the backbone of a thriving economy and the ETF DBB is drifting to March lows. If there is weakness in Copper or the group in general, this could be a red flag for the economy, signaling that consumers are still struggling. Now consumers (XRT, XLY) have been strong but they are the most economically sensitive group, so if the upside does get pressured these sectors could be foreshadowing weakness. See you After Hours.

Trading is uneventful following a round of mixed economic news Thursday. Data was in focus early after the latest report on GDP showed the economy growing at a 1.8 percent annualized rate in the first quarter of 2011. Economists were expecting 1.7 percent. Separately, the Labor Department reported that weekly jobless claims increased by 25,000 in the period ended April 23. Economists were looking for a decline of 14,000. However, a third report released later showed pending home sales up 5.1 percent in March, which was significantly better than the 1.7 percent that was expected. The earnings news is light. Dow component Procter & Gamble (PG) has overcome early weakness and is trading higher after announcing an 11 percent increase in quarterly profits. Sprint (S) and homebuilder Pulte Group (PHM) are seeing post-earnings strength after reporting smaller-than-expected losses. The Dow Jones Industrial Average is up 42 points, but the tech-heavy NASDAQ lost 5. The CBOE Volatility Index (.VIX) gave up .47 to 14.88. Overall options volume is running about the typical levels, with 5.5 million calls and 4 million puts traded through 12:30pm ET.

Bullish Flow
Microsoft (MSFT) calls are busy ahead of earnings. The software giant is due to release its results after the closing bell today. There seems to be some optimism building. The stock is up 30 cents to $26.68 through mid-session. Meanwhile, 168,000 calls and 62,000 puts have traded in Microsoft so far. May 27 calls, which are 1.2 percent out-of-the-money, are the most actives. 41,000 contracts have changed hands. The Weekly options, which will have one day of life remaining after Microsoft reports earnings, are seeing interest as well. The Weekly $27 calls have traded 33,400 contracts. If shares settle at $27 or less tomorrow, the contract will expire worthless. If not, the value of each contract will be equal to the difference between the stock price and 27 at the expiration.

Sprint Nextel (S) shares are rallying and calls on the telephone company are busy today. Shares are up 22 cents to $5.01 after Sprint said it lost 15 cents per share in the quarter. Analysts were looking for a wider 22-cent per share loss. Meanwhile, 66,000 calls and 8,255 puts traded in the name through midday. Yet, while calls are dominating the action, the overall flow isn't entirely bullish. The top trade of the day was a block of 29,000 August 5.5 calls, which was sold at 24 cents per contract. The investor might see today's strength as an opportunity to sell out-of-the-money premium in Sprint.

Bearish Flow
SunPower Tech (SPWRA), a San Jose, CA solar electric power company, is trading down 21 cents to $15.69 amid relative weakness in the space. SPRWA, JA Solar (JASO), Yingle Energy (YGE) fell in morning trading after RenaSolar (SOL) posted earnings that fell short of expectations. SOL lost 6 percent. Meanwhile, put volume is picking up in SPWRA today. The action includes a 2,200 contract block of May 15 puts which traded on the ISE and, according to sentiment data on the exchange, is an opening buyer. Volume is approaching 7,000 contracts. December 17 puts are seeing interest as well. The increased put activity comes ahead of SunPower's earnings, which are due on the afternoon on May 12.

Wholefoods Markets (WFMI) is trading down $3.78 to $61.35 and options on the grocery chain are active. There's no news on the stock. Still, shares are under pressure and volume in WFMI options is 9,690 puts and 5,665 calls. Most of the action has been in smaller sizes. The top trade is a 400-lot of Jan2013 60 puts traded at$9.95 per contract. Meanwhile, May 55 puts, which are 10.4 percent out-of-the-money and expire in 22 days, are the most actives. 2,225 traded. May 67.5 calls are seeing interest as well. Some investors might be taking positions in anticipation of earnings, which are expected the morning of March 4.

Baidu.com (BIDU) options volume is running 2X the (22-day) average, with 164,000 contracts traded and call volume accounting for about 59 percent of trades.

Akamai (AKAM) options volume is 4X the average daily, with 73,000 contracts traded and call volume representing for 64 percent of the activity.

Eastman Kodak (EK) options volume is running 2X the average daily, with 46,000 contracts traded and call volume accounting for 62 percent of the activity.

Increasing options activity is also being seen in Pulte Group (PHM), Kinross Gold (KGC), and SPDR Industrials ETF (XLI).

Implied Volatility Mover
Implied volatility in LongTop Financial (LFT) is easing, as the stock rebounds from recent losses. Shares of the Hong Kong-based financial services software developer took a two-day 30.6 percent plunge after Citron Research wrote a cautious research note about the company Tuesday. Shares have added $2, or 11.3 percent, today and LFT options remain actively traded. 12,000 puts and 2,800 calls so far. Some investors might be selling puts and closing out positions after the stock's recent nosedive. Implied volatility, which hit new highs of 141 yesterday, is down 18 percent to 117.