Headline Away from Adding Volatility 05-31-2011

Cusick's Corner
A few weeks ago I wrote that I had never seen a market top when retail sentiment shifted to the sidelines so quickly. But the skeptics are gaining some decent bullets, the data stinks. This has investors scratching their heads, watching this market run. But traders are just waiting for the right time to pounce and as I said in the Midday, it is not now. While we are a headline away from adding volatility to this market, the upside is not worth fighting -- yet. With the S&P holding critical levels of 1344, there is room to run to the upside but I am looking at stiff resistance to kick in, potentially at 1370. The number to watch tomorrow is the ISM which is out 10 am ET. The ISM is often discounted (rightly so if you look at the fact there is no differentiator between the big and the small purchasing managers) but could be another wet blank from a data perspective on the current state of the economy. See you Midday.

Stock market averages rallied despite disappointing economic data Tuesday. The table was set for early gains on Wall Street after talk of a bailout of Greece sent the euro rallying against the buck. However, while the euro gave back some of the early advance, the day's domestic news seemed to weigh on investor sentiment as well. The Chicago Purchasing Managers Index, a gauge of regional manufacturing activity, fell to 56.6 in May, from 67.6 the month before. Economists were looking for the PMI to dip to 62.5. Separately, the Commerce Department reported that its index of Consumer Confidence fell to 60.8 in May. Economists were expecting it to hold steady at 66. Although trading was sluggish on the data through midday, a round of end-of-month buying interest surfaced in the final hour. By the closing bell, the Dow Jones Industrial Average was up 128 points and near the best levels of the day. The tech-heavy NASDAQ added 38.4.

Bullish
Yongye International (YONG) saw a day of brisk trading Tuesday. Shares of the Beijing-based agricultural chemicals company rallied on news the company's Chief Executive Officer intends to buy $3 million worth of shares. In addition, Morgan Stanley Private Equity Asia is taking a $50 million stake in the company. The investments seem to have eased some of the recent worries surrounding the company. Shares were down 55.4 percent year-to-date heading into today. However, the stock gapped higher at the open and finished the day up $1.58 to $5.33. Meanwhile, options volume in YONG was 13,000 calls and 4,350 puts. June 6 calls, which are 12.6 percent out-of-the-money and expire in 17 days, were the most actives. 2,785 traded. June and July 5 calls were actively traded as well.

Bullish trading was also seen in Optimer Pharmaceuticals (OPTR), Coca Cola (KO), and Pulte Group (PHM).

Bearish
Oil giant BP shares gained 70 cents to $46.24 and have been bubbling higher with the price of crude oil lately. Crude gained $2.06 to $102.65 a barrel Tuesday. BP has now rallied 8.9 percent since May 16. In options action today, BP June 44 puts saw noteworthy activity. A 7,500-contract block traded at 17 cents per contract on the International Securities Exchange this morning. An investor bought-to-open the position, according to data from the exchange. At the end of the day, more than 11,000 contracts had changed hands. The June 44 put is 4.8 percent out-of-the-money and expiring in less than three weeks. Therefore, today's put buyers seem to be bracing for BP to give back some of its recent gains in the days ahead.

Bearish flow also surfaced in LDK Solar (LDK), Nokia (NOK), and RF Micro Devices (RFMD).

Index Trading
CBOE Volatility Index (.VIX) hit a morning high of 16.5, but then faltered late in the day to finish down .53 to 15.45. The volatility index is down 15.4 percent since last Monday, but finished the month of May with a 1.7 percent gain. VIX hit a multi-year low of 14.27 on the final trading day in April. Meanwhile, VIX options were very actively traded Tuesday. 363,000 calls and 92,000 puts traded on the volatility index today. June 27.5 calls were the most actives. 67,172 traded and the volume included some ratio spreads, in which the investor was buying June 21 calls, selling twice as many June 27.5 calls, and bracing for a big move in the volatility index between now and the June expiration, which is in 14 days for VIX options.

ETF Action
US Natural Gas Fund (UNG) saw a second consecutive day of heavy trading. As noted in the previous wrap, 66,000 calls and 23,000 puts traded on the ETF Friday. Today, shares gained 31 cents to $11.79 after natural gas prices rose 14 cents to $4.66 per BTU. Meanwhile, options volume in the natural gas fund, which tracks the commodity through futures contracts, was 99,000 calls and 29,000 puts. June 12 calls, which are 1.8 percent OTM, were the most actives. Volume approached 40,000, as some players might be taking positions on hopes higher natural gas prices will continue to fuel a rally in the UNG. October 12, 13 and 14 calls were actively traded as well. UNG June 11 and 12s were the most active puts.