Defense is the Best Offense 04-14-2011

Cusick's Corner
You have heard the analogy, Defense is the best Offense, but did you think of that when you look at your portfolio. Oil and Metals have been moving this year but have definitely hit some resistance, especially with commodity inflation so prominent and expanding. This has put institution traders on alert and in a rotating move, adding exposure in the Consumer sector -- Coke (KO) and Drug sector -- Abbott Labs (ABT). We have also seen the Put/Call Ratio pop, almost 2-1 on average over the past 20 sessions. For technicians this market has been in need of a pullback after this impressive run since February, but headlines, mixed earnings early and disappointing data is weighing on the short-term market. Tomorrow is going to be very busy with options expiration and a ton of data starting with CPI pre market and Production at the open, volatility could be in the market early. See you Midday.

The table was set for early weakness on Wall Street after the Labor Department reported that jobless claims increased by 27,000 to 412,000 last week. Economists were looking for weekly claims to hold steady at 385,000. The Labor Department also reported that its Producer Price Index [PPI], a gauge of inflation on the wholesale level, increased by .7 percent. Economists were looking for an increase of 1.1 percent. The weak data weighed on early trading, but the decline never gathered any real momentum. Instead, with not much other news to guide trading, afternoon action turned somewhat choppy and range bound. Google (GOOG) is out with earnings after the close. Dow component BofA (BAC) reports Friday morning and then the floodgate on first quarter earnings really opens next week. Investors are in wait-and-see mode, but volatility and volume could pick up a bit tomorrow due to the options expiration. Friday is the last day to trade expiring April contracts. Today, however, stock market averages finished little changed. The Dow Jones Industrial Average added 14 points and the tech-heavy NASDAQ lost 1.3.

Bullish
Lockheed Martin (LMT) shares fell on concerns that Obama's new plan to reduce the deficit might lead to drastic cuts in military spending. The Pentagon is seeking $400 billion in spending reduction. LMT, an aerospace and defense company, lost 58 cents to $77.73 on the session. However, the options order flow was mixed. In fact, May 80 calls were the most actives. 10,785 traded, including a 4,450 contract block at 83 cents. It traded on the International Securities Exchange, where sentiment data indicate that an investor bought-to-open a new position. The May 80 calls are 2.9 percent out-of-the-money and expire in five weeks. If bought at 83 cents, the position breaks even at $80.83 at the expiration, which represents a move of about 4 percent. Lockheed's earnings will come into play on April 26 (before market).

Bullish trading was also seen in Supervalu (SVU), Nuance Communications (NUAN), and Cheniere Energy (LNG).

Bearish
Baxter (BAX) shares came under fire and puts on the medical supplies company were actively traded today. The stock sank in volatile morning trading beginning at about 11:00am ET and hit a low of $52.94. It's not clear what was driving the action, but share volume was heavy and options action picked up as well. 7,475 puts and 740 calls traded in Baxter. April 52.5 puts, which are now $1.27 cents out-of-the-money, were the most actives. 3,315 traded. Another 2,220 April 55 puts changed hands. Shares later recovered and finished the day down .37 to $53.77. The company is due to report earnings on April 21, but that would not explain the increased interest in April puts because those contracts expire after tomorrow.

Bearish flow also surfaced in Yongye International (YONG), Waste Management (WM), and Ericson (ERIC).

Index Trading
The April options expiration has stirred up a bit more volume, but not much volatility thus far. 719,000 calls and 759,000 puts traded across the S&P 500 Index (.SPX) and other index products. A lot of the activity was likely closing and rolling activity due to the expiration. Since settlement values on many indexes are computed using Friday morning prices, the last day to trade the contracts is on the Thursday before the expiration - which is today. Meanwhile, the CBOE Volatility Index (.VIX) finished down .65 to 16.27 and finished at its lowest closing levels since February 18. There is not much volatility in the market despite the increased volume due to the expiration.

ETF Action
iShares Emerging Markets Fund (EEM) added .15 to $49.07 and an impressive spread traded in the ETF Thursday morning. In this options play, the investor bought 42,000 June 47 puts at $1.26 and sold 42,000 June 42 puts at 33 cents. The spread, for a net debit of 93 cents, is a bearish play or maybe a hedge. It makes its best profits if shares of the ETF fall to $42 or less through the June expiration, which represents a 14.4 percent decline over the next 64 days. Since EEM is a fund that holds shares of companies from China, Russia and other developing countries, it's not a play on the US market, but rather a play on events abroad.