Downside Should Be Respected 06-02-2011

Cusick's Corner
Where do you start? Well for one the data was not good (ISM/Claims showing slower growth) and Greece looked for certain to go into default. But wait, the ECB announces a new plan to bailout Greece, popping the Euro and other Currencies (especially commodity based currencies like the Aussie) - drilling the Dollar down and buoying, for now, domestic equities. I want to see if any bounce into the After Hours is met with same wrath of selling that we experienced yesterday, plus is there's another challenge to CRITICAL support, 1302 on the S&Ps. Stick with spread strategies in this fragile market, like the ones that we have discussed in previous Corners, go to the blog www.xpoundblog.com. See you After Hours.

Market action is mixed midday. After a 280-point nosedive Wednesday, the Dow Jones Industrial Average opened steady and drifted a bit higher at the open. Early economic data showed jobless claims declining by 6,000 to 422,000 in the final week of May. Economists were looking for a decline to 413,000. Meanwhile, first quarter productivity increased by 1.8 percent, which was .2 percent better-than-expected. However, a separate report released later showed factory orders falling by 1.2 percent in April, which was slightly worse than the 1 percent decline that was expected. The data had little market impact and stock market averages bounced at the open. The gains didn't last however, as some of the financials came under pressure after Moody's said it was putting up for review the ratings of several large US banks. News that a New York prosecutor subpoenaed Goldman Sachs (GS) also weighed on the financials. Meanwhile, crude oil is down for a second day and now off $1.59 to $98.70 a barrel. Exxon (XOM) and Chevron (CVX) are among the Dow's biggest losers and the industrial average is off 40 points. However, the tech-heavy NASDAQ gained 2 points. The CBOE Volatility Index (.VIX) edged down .21 to 18.08. Overall options volume is picking up and reflects the cautious underlying tone, 4.2 million calls and 4.5 million puts traded through 12:30pm ET.

Bullish Flow
Corinthian Colleges (COCO) and shares of other for-profit education companies (CECO, APOL, DV, STRA) are rallying today after new gainful employment rules governing student loans were released last night. The guidelines were apparently not as severe as some had feared. COCO is up $1.21, or 30 percent, to $5.20 today. Meanwhile, options volume in the education company is 7X the average daily. 12,000 calls and 5,325 puts traded in COCO. August 5 calls, which are now 20 cents in-the-money, are the most actives. 2,140. Some investors might be liquidating positions in the wake of the rally. 64 percent of the volume traded on the bid. August 6 puts, June 5.5 calls, June 5 puts, and July 4 calls are the next most actives.

Delta Airlines (DAL) is seeing increasing call volume Thursday. Shares are up 2 cents to $9.70 and attempting to stabilize after a 7-day 15.6 percent slide. Meanwhile, 11,000 calls and 1,065 puts traded in the name. July 10 calls, which are 30-cents out-of-the-money, are the most actives. 4,053 traded. July and September $11 calls are seeing interest as well. Since about 80 percent of the call volume traded at the ask, the action looks like OTM call buying in anticipation of a rebound in Delta shares through the July expiration.

Bearish Flow
Put volume is picking up in Arch Coal (ACI). Shares of the coal producer are down $1.07 to $27.75, the day after the company began a public offering of 44 million shares of common stock. Shares are perhaps lower due to concerns about possible earnings dilution. For whatever reason, ACI is down 3.7 percent and puts are active in the name as well. 21,000 so far, which is 11X the typical put volume and compares to 7,500 calls traded. June 34 puts, which are 18.4 percent in-the-money and expiring in 15 days, are the most actives. June 31 and 30 puts are seeing active trading as well.

Financial Select Sector Fund (XLF) has had a whippy session. Shares opened at $15.33 and edged up to $15.33. However, shares came under pressure in morning trading after Moody's put ratings of several major US banks up for review and Goldman Sachs shares fell on news of a subpoena from a Manhattan prosecutor. XLF hit low of $15.21, but has rebounded through midday is up a nickel to $15.36. Options action is defensive. 159,000 puts and 41,000 calls traded on the financial ETF. June 16 and July 15 puts are the most actives.

Unusual Volume
Brocade (BRCD) options volume is running 13X the (22-day) average, with 123,000 contracts traded and call volume accounting for about 74 percent of trades.

Oracle (ORCL) options volume is 2X the average daily, with 67,000 contracts traded and call volume representing for 71 percent of the activity.

Apollo Group (APOL) options volume is running 5X the average daily, with 53,000 contracts traded and call volume accounting for 53 percent of the activity.

Increasing options activity is also being seen in DR Horton (DHI), Genworth (GNW), and Arch Coal (ACI).

Implied Volatility Mover
Goldman Sachs (GS) implied volatility is moving up. Shares hit a morning low of $131.50 in volatile market action after the news wires buzzed with reports that the investment bank received a subpoena related to the financial crisis. Yet, shares have come well off session lows and are down $1.44 to $134.73. Options action is also brisk. 47,000 calls and 62,000 puts in GS so far. Meanwhile, implied volatility in Goldman Sachs options is up 6 percent to 27.