Today's Action Had Some Buying on the Dips 04-07-2011

Cusick's Corner
The news today that Japan experienced yet another earthquake spooked the market, triggering selling. There were initial reports that their nuclear facilities did not suffer any damage so the sell-off did not last long and there was buying on the dips, which helped the markets trade higher from their session lows. The S&P 500 closed at 1333.51 which is still above critical support level of 1326 (trading range today was 1,326.56 - 1,338.80). The VIX moved to 18 today on the news in Japan, but finished the day up .21 to 17.11 (see Index Trading). Crude Oil (CLK11) prices climbed to two-year highs above $110 per barrel due to continued fighting and major damage to an oil field in Libya. There is lots of international news to digest. See you Friday.

Stock market averages fell Thursday morning after another big quake hit Japan, but then recovered most of the losses in afternoon trading. Economic data came into focus early after the Labor Department reported that jobless claims fell by 10,000 to 382,000 in the week ended April 2. Economists were looking for a decrease of about 5,000. At the same time, while Bed, Bath and Beyond (BBBY) rallied on earnings news, Costco (COST), JC Penney (JCP) and a handful of other retailers helped the sector on upbeat monthly same store sales results (see ETF section below). The jobless claims and retail sales results seemed positive enough to outweigh news that the European Central Bank voted to raise rates Wednesday. However, while trading was steady early, stocks came under fire in mid-morning action on news of another massive earthquake and tsunami alert north of Tokyo. But the sell-off didn't last long and stocks were trading mixed at midday. Market action was choppy in afternoon action and into the closing bell. At the end of the day, the Dow Jones Industrial Average was down 18 points, but more than 80 points off session lows. The NASDAQ Composite lost 3.7 points.

Bullish
United Continental (UAL) has been under pressure in recent days. Shares lost 23 cents to $21 today and are off 23.6 percent in less than two months. Several factors are weighing on the industry, including the soaring costs of energy (jet fuel) and canceled routes to Japan. However, while shares are falling, one contrary-minded investor appears to be looking for a turnaround in UAL in the months ahead. In midday action, a three-way spread was initiated in the airliner. In this trade, the investor sold 10,000 June 19 puts at $1.12, bought 10,000 June 22 calls at $1.44 and sold 10,000 June 26 calls at 42 cents. Basically, they sold the puts to buy the call spread and collected 10 cents on the three-way. It's a bullish play, as it makes its best profits if shares rally back beyond $26 through the June expiration. By selling $19 puts, they're also making a statement that they are willing buyers of the stock at that price level.

Bullish trading was also seen in Tesla Motors (TSLA), Costco (COST), and HSBC (HBC).

Bearish
Bearish traders circled chip equipment maker Altera (ALTR) today. Shares lost 43 cents to $43.07 on a day of relative weakness in the sector (NVLS, XLNX, AMAT, KLAC also traded lower). The weakness in the sector is being attributed to an analyst downgrade of Lam Research (LRCX), which fell 5 percent after having its rating cut to Sell. Meanwhile, in ALTR options action, 9,540 puts and 580 calls traded in the name. May 40 and 35 puts were the most actives and seemed to include some bearish spread trading, in which one or more investors bought May 40 puts and sold the 35s. Both contracts traded more than 3000X.

Bearish flow also surfaced in SuperValu (SVU), Novellus (NVLS), and UBS.

Index Trading
The market reaction to news of another quake north of Tokyo today was decidedly different than in mid-March. On March 16, volume in S&P 500 Index (.SPX) puts surged and the CBOE Volatility Index (.VIX) hit a multi-month high of 31.28. Today, VIX saw a move towards 18 on the news, but finished the day up .21 to 17.11. Meanwhile, overall volume in the index market remains very light. 152,000 calls and 72,000 puts traded in the VIX, which is only about half the normal levels. 374,000 calls and 488,000 puts traded across all the index products. VIX April 20 calls, which expire in twelve days, were the most actives. 16,700 traded.

ETF Action
SPDR Retail Trust (XRT) shares gained 44 cents to $52.55 with help from Bed, Bath and Beyond (BBBY). Shares of the retailer rallied 10.5 percent after the company reported earnings that topped Street estimates. Meanwhile, Costco (COST), Macy's (M), the Limited (LTD) and a few others were up on upbeat March same store sales numbers. Yet, while the sector saw relative strength today, trading in the XRT, which is an exchange-traded fund that holds a basket of different retailers, was decidedly bearish. 97,000 puts and 5,265 calls traded in the ETF. May 50, May 51 and September 50 puts were the most actives, as some investors appeared to be taking positions in the out-of-the-money puts on the view that today's gains in the retail sector probably won't hold.