Short-Term Action Broke Through Resistance 05-10-2011

Cusick's Corner
The mood in the market is more upbeat. Short-term market action broke through resistance of 1350 on the June S&P500 future which means that this move to the upside might have a fighting chance. Small Cap and Mid Cap stocks have been leading this market's move higher. Most mergers and acquisitions are happening in the Small and Mid Cap range which has led to some bullish speculation. Most companies in the S&P500 have already reported earnings so traders will now start to focus on how the Fed plans to wind down their Quantitative Easing program known as QE2. Crude Inventories come out tomorrow at 10:30am ET. See you Wednesday.

Stock market averages finished with a third day of modest gains with help from economic data. A report released overseas showed the Chinese economy logging an$11.4 billion trade surplus in April, which was four times more than expected. The news seemed to help ease some concerns about economic activity in the world's second largest economy. In the US, domestic economic data included a 2.2 percent uptick in April import prices, which was .7 percent more than expected and marks the first time prices have increased by more than 2 percent since July 2008. Separately, a report on March Wholesale Inventories increased by 1.1 percent and slightly more than the 1 percent that was expected. The day's data didn't make too many waves on Wall Street. Meanwhile, a big merger was announced after (MSFT) said it was buying Skype for $8.5 billion. Dean Foods (DF) and Medifast (MED) moved up on earnings news. Gold gained $12.10 to $1,515.30 an ounce and crude oil added 95 cents to $103.50 per barrel. The Dow Jones Industrial Average finished the day with a 75-point gain. The tech-heavy NASDAQ added 28.6.

Bullish
Hertz (HTZ) shares edged down 9 cents to $16.59, the day after the auto rental company announced a new bid to buy rival Dollar Thrifty (DTG). The latest offer values DTG at about $72, or $57.60 per share plus .8546 HTZ shares. Hertz options have been active since the news was announced Monday. 9,940 calls and 150 puts traded Tuesday. The biggest trade was a 3,415-contract block of January 17.5 calls at $1.80. It traded on the International Securities Exchange, where sentiment data indicate that a customer bought-to-open a new position. Another noteworthy trade in HTZ today was a September 16 - 19 call spread that traded for $1.30, 2400X, and also seems to be a bullish play on expectations for a rally in Hertz shares in the months ahead.

Bullish trading was also seen in US Airways (LCC), Goodyear Tire (GT), and AIG.

Bearish
Dell Computer (DELL) shares notched a new 52-week high and finished today's session up 22 cents to $16.41. Options volume in DELL included 13,000 calls and 22,000 puts. The top trade is a spread, in which the investor apparently bought 7,500 January 15 puts at $1.08 and sold 7,500 January 11 puts at 22 cents. The spread, for a net debit of 86 cents, is a bearish play. It makes its best profits if shares fall to $11 or less through the January expiration. A shareholder might have initiated the position as a hedge or to protect recent gains in the stock. DELL reports earnings on May 17.

Bearish flow also surfaced in Biometric Therapeutics (BMTI), PDL BioPharma (PDLI), and Dow Chemical (DOW).

Index Trading
The CBOE Volatility Index (.VIX) slipped for a second day. After losing 1.24 to 17.15 Monday, the volatility index lost another 1.25 to 15.91. VIX is down 13.5 percent on the week, as the market has been trading relatively quiet so far. Volume has also been light. Today for example, 485,000 calls and 473,000 puts traded across the S&P 500 Index (.SPX), VIX and other cash indexes, which is about 90 percent the recent average daily volume, according to Trade Alert data. VIX May 21 and 25 calls were the most actives and included some ratio spread trading. For example, a block of 6,750 May 21 calls traded at 30 cents while twice as many (13,500) May 25 calls traded at an average of 12.5 cents. The action looks like a bullish 1X2 ratio call spread targeting 25 on the volatility index at the VIX May expiration, which is a week from tomorrow.

ETF Action
Utilities Select Sector Fund (XLU) touched a new 52-week high and finished the day up 48 cents to $33.84. Options volume in the ETF included 39,000 calls and 5,000 puts. The top trade was part of a spread, in which the investor sold 2,500 June 33 calls at $1.08 and bought 10,000 of the September 35 - 36 call spreads at 27 cents. The action appears to be roll. That is, they closed out a position in the June 33 calls, which are now 84 cents in-the-money, and opened a new position in the September spread. They might have anticipated the gains in XLU shares, which include all of the utility names from the S&P 500, and now expect the rally to continue through mid-September.