Sector Shift 05-11-2011

Cusick's Corner
Today's headlines: Dollar up, China potentially slowing down, Inflation Concern in the UK, and Offensive Sectors getting hit, XLF/XLK/XLE, most notably Energy. While the dollar might be perceived as a catalyst for the pullback, the real drivers are the Inventories number (released this morning -- higher supplies) and the Euro (also starting to pressure the precious metals). This is raising a red flag that prices and inflation seem to have impacted consumption and if consumers are scaling back then we have a potential issue with the growth picture. Another flag that the market has been taking a more defensive posture is that Healthcare and Consumer Staples, the higher dividend stocks, have been the driving force in the equities, signaling a more measured Risk Trade. See you After Hours.

Stock market averages are under water midday. Disney (DIS) is down 4.9 percent and the biggest drag on the Dow Jones Industrial Average after the media giant's earnings fell short of expectations. Exxon (XOM) and Chevron (CVX) are also hurting the Dow. Shares are trading lower along with oil prices. Crude lost $4 to $99.88 on bearish inventory data and after the buck bounced against the euro. The European currency is trading down 1.3 percent against the dollar amid ongoing anxiety about the European debt problems. Gold lost $15.70 to $1,501.20 an ounce. On the economic front, data released this morning showed the nation's Trade Balance at -$48.2 billion in March, which was up from $45.4 billion the month before and also worse than the $47.7 billion deficit that was expected. The Treasury Budget is released this afternoon. The focus seems to be the euro and action in the commodities market, however, and the Dow Jones Industrial Average is down 155 points. The tech-heavy NASDAQ lost 31.3 ahead of earnings from Cisco Systems (CSCO), due after the closing bell. The CBOE Volatility Index (.VIX) jumped 1.34 to 17.25. Trading in the options market includes 4.6 million calls and 4.1 million puts traded through 12:25pm ET.

Bullish Flow
Macy's (M) is up $1.87 to $28.20 and trading in options on the retailer is heavy today after the company reported earnings that beat Street estimates. Macy's also raised full year earnings guidance and said it was increasing its dividend. 62,000 calls and 28,000 puts have traded in M on the day. May 27 calls, which are now $1.20 in-the-money, have traded 9,280 contracts. June and August 27 calls are seeing interest as well. Some investors might be exiting positions in ITM call options after the stock's recent rally. Macy's is now up 17.9 percent month-to-date.

Technology Select Sector Fund (XLK) is seeing increasing volume today. Shares are down 27 cents to $26.56 and today's volume of 58,000 calls and 210 puts is 3X the normal. May 27 calls, which expire at the end of next week, are the most actives. Volume is more than 52,000 contracts. Open interest is 19,723. So, this looks like opening activity. Some investors might be taking bullish positions ahead of earnings from tech bellwether Cisco, which are due after the closing bell today. XLK is an exchange-traded fund that holds all of the technology names from the S&P 500. Cisco is one of the largest components.

Bearish Flow
Put volume is picking up in homebuilder Toll Brothers (TOL) Wednesday. The company is delivering a presentation at a Wells Fargo conference today and maybe something cautious or bearish was said. For whatever reason, shares are down 22 cents to $20.31 and options volume is 10,000 puts and 155 calls, or 7.5X the average daily volume for TOL. May 21 puts, which are now 70 cents in-the-money and expire at the end of next week, are the most actives. 4,335 traded. January 20 and 21 puts are busy as well. Implied volatility rose 14 percent to 32.5. Earnings come into play on May 24, which is after the May options expiration.

71,000 puts and 22,000 calls traded on the iShares Emerging Markets Fund (EEM) today. Shares are down $1.20 to $47.71 and morning trades include a June 49 - 45 put spread, which was bought at $1.35, 10000X. That is, the investor bought 10,000 of the Jun 49s at $1.79 and sold 10,000 of the 45s at 44 cents. It's a bearish spread, as it makes its best profits if shares fall to $45 or less by the June expiration, which represents a 5.7 percent decline over the next 37 days.

Unusual Volume
Yahoo (YHOO) options volume is running 3X the (22-day) average, with 275,000 contracts traded and call volume accounting for about 66 percent of trades.

Macy's (M) options volume is 6X the average daily, with 81,000 contracts traded and call volume representing for 61 percent of the activity.

Marvell Technology (MRVL) options volume is running 3X the average daily, with 78,000 contracts traded and call volume accounting for 95 percent of the activity.

Increasing options activity is also being seen in Disney (DIS), UPS, and Colgate Palmolive (CL).

Implied Volatility Mover
Biometric Therapeutics (BMTI) implied volatility remains elevated, as shares fall for a second day. BMTI lost 35.3 percent yesterday. Shares are down another 11.4 percent to $7.67 today. The stock is reeling on concerns that the FDA might express concerns about safety of the company's bone graft device, which is pending FDA approval tomorrow. Options are actively traded as well. 12,000 calls and 7,300 puts traded in BMTI today. Implied volatility is up another 9 percent to 225.