Market Cleared Critical Resistance 06-30-2011

Cusick's Corner
The end of the month has come and gone and now the market has cleared a critical resistance point, 1213.5 on the S&P futures, opening the door for new support to be established. While tomorrow may be busy in the morning with the Michigan Sentiment and ISM due out after the open, the trade desks will be light by midday leaving the opportunity for some whippy action. Review your positions, think of some potential protection into the weekend if you are long, and if you have bearish positions, monitor them so that the time decay doesn't get too painful if no headlines or surprises hit the airwaves. See you Midday.

The second quarter ended on a strong note amid optimism for Europe and upbeat domestic economic news. The table was set for steady early trading on Wall Street after Greek parliament passed a second austerity bill designed to prevent debt default. European stock benchmarks and the euro moved solidly higher. In the US, focus then shifted to the Chicago PMI at 10:00am ET. The gauge of regional manufacturing activity showed a surprise jump to 61.6 in June, from 56.6 the month before and significantly better than the 54 that was expected. The report held some sway, as its release was one day before ISM releases its gauge of nationwide manufacturing activity Friday. End-of-quarter window dressing seemed to be a factor as well. Overall, the bulls remained in control and helped send the Dow Jones Industrial Average higher for a fourth day. At the closing bell, the Dow was up 153 points on the day and, thanks to the four-day 479-point surge, added 94 points in the second quarter. The tech-heavy NASDAQ added 33 points today.

Bullish
Some of the rare earth names rallied today after Bloomberg reported that Malaysian government officials have delayed a plant due to safety concerns. The delay of the rare earth refinery seems to have fueled speculation that tighter supplies will lead to higher prices for rare earth materials. Molycorp (MCP) shares gained $4.04 to $61.06 and Rare Element (REE) rallied 59 cents to $11.09. Meanwhile, Avalon Rare Metals (AVL) saw both relative strength and increased call activity. Shares gained 43 cents to $6.95. Options volume in AVL included 5,475 calls and 485 puts. July 7.5 calls, which are 55 cents out-of-the-money and expiring in two weeks, were the most actives in AVL. 2,630 traded. In addition, since 94 percent traded at the ask, it appears that buyers were driving the flow in those calls and looking for the stock to move beyond $7.5 before the July expiration. Since Monday is an exchange holiday, only ten trading days remaining.

Bullish trading was also seen in Tellabs (TLAB), NetApp (NTAP), and Nordstrom (JWN).

Bearish
Onyx Pharmaceuticals (ONYX), a San Francisco-based biotech, saw relative weakness and heightened put activity. Shares came under pressure late-morning and hit a midday low of $34.60. There was no obvious news to explain the action, but increased put volume accompanied the move. At the end of the day, shares were down $1.02 to $35.30 and 7,830 puts traded in the name. By way of comparison, 570 calls changed hands in ONYX and typical put volume is 550 contracts. November 23 puts, which are 34.8 percent out-of-the-money, were the most actives. 1,600 traded. July 34, August 22.5, and July 33 puts were busy as well. There seemed to be a mix of put buying and selling, but the relative weakness in the stock and high put volume seem to reflect some underlying concern about the short-term outlook for ONXX shares.

Bearish flow also surfaced in Crown Castle (CCI), CF Industries (CF), and Qiao Xing Universal Resources (XING).

Index Trading
Trading volume picked up in the index options market due to end-of-quarter position squaring. The third quarter begins tomorrow. Today, 807,000 calls and 824,000 puts traded on the S&P 500 Index (.SPX), Russell 2000 Small Cap Index (.RUT) and other cash-settled indices, which is the highest volume so far this week. CBOE Volatility Index (.VIX), which tracks the expected volatility priced into S&P 500 index options, lost .75 to 16.52 and is on a four-day 21.7 percent skid. VIX declined by 6.9 percent during the quarter. Meanwhile, the S&P 500 finished the day up 13.23 to 1,320.64 and lost about 5 points or .38 percent for the second quarter. In today's options action, SPX July 1200 puts, which are 9.1 percent OTM and expiring in two weeks, were the most actives. 55,260 contracts changed hands.

ETF Action
Bearish butterfly spread traders were busy in the SPDR 500 Trust (SPY) for a second day. In yesterday's wrap, we noted large positions in the July 123 - 126 - 129 put butterfly spread for a 39 and 32 cents. The same spread was bought again today. In this spread, the strategist sold 40,000 SPY July 126 puts at 28 cents, bought 20,000 Sep 123 puts at 15 cents and bought 20,000 Sep 129 puts at 61 cents. In other words, they bought the 126s and 129s for the wings and sold the 126s for the body, paying a net debit of 20 cents, 20000X. Shares added $1.25 to $131.97 and the spread trading is probably a short-term hedge, as the fly makes its best profits if SPY falls to $126 through the expiration, which represents a market decline of 4.5 percent over the next 15 days.