Energy Stocks Showing Weakness 06-13-2011

Cusick's Corner
Let's take a look at a major sector -- most notably beaten up is Energy, Crude down $-2.19, and the Energy ETF XLE has broken support. This break is a potential signal that the part of the market that has been outperforming is now under pressure since the Saudis came in and upped production. If you look at the stocks that make up the Energy ETF XLE, there are some big hitters like XOM, CVX, COP, SLB, and OXY, all flagging either stiff technical resistance or weakness. Put spreads might be in order for either protection or as a potentially bearish strategy. Strike selection will be pinnacle, so review what your risk tolerance was/is and position accordingly. See you Midday.

Stock market averages opened higher following a round of corporate deal-making, but most of the gains were lost and stocks finished mixed Monday. With no economic data to guide morning action, stock news was in focus when Wendy's/Arby's (WEN) announced plans to sell its Arby's unit to a private equity firm. Meanwhile, VF Corp (VFC) announced plans to buy footwear maker Timberland (TBL) for more than $2.2 billion. After six consecutive weeks of losses, the Dow Jones Industrial Average opened higher, but then gave up most of the advance on news S&P has downgraded Greece. The news pushed the European Debt Crisis back into the spotlight and, while the dollar strengthened, oil fell. Crude lost $2.43 to $96.86 per barrel. On Wall Street, the Dow Jones Industrial Average gained just one point and finished 58 points off session highs. The tech-heavy NASDAQ gave up early gains and finished down 4 points.

Bullish
Ivanhoe Mines (IVN), a Vancouver-based gold, copper and uranium miner, saw strength and increasing call activity despite weakness in the metals markets today. Gold gave up $13.2 to $1516 an ounce. Copper, silver and platinum also finished with losses. Yet, Ivanhoe shares added 18 cents to $22.17 and options volume in the miner was 7,840 calls/1,220 puts. January 25 calls, which are 12.8 percent out-of-the-money and expire in six months, were the most actives. 5,585 changed hands. It appears that investors were paying between $2.20 and $2.30 for the contract and might be adding to existing positions. Open interest in the Jan 25 calls is already 21,594 and the largest position in IVN. Meanwhile, July 25 calls traded 1,330 contracts against 479 contracts in open interest. It's not clear what was driving the action, because there was no news on the stock. For whatever reason, it looks like some investors are positioning for the stock to rally beyond $25 in the weeks/months ahead.

Bullish trading was also seen in Liberty Global (LBTYA), Harvest Natural Resources (HNR), and First Horizon (FHN).

Bearish
ITT Education Services (ESI) saw interesting options action today. Shares finished down 3 cents to $82.10, but have rallied 16.1 percent since June 1. Most of the gains were recorded on June 2, when shares of numerous for-profit education companies rallied on news the Department of Education is allowing colleges up to three years to meet certain tests relate to student graduation and employment rates. Shares have been in a range since that time and one strategist seems worried about a possible dip in the days ahead, as a June 77.5 - 72.5 put spread was bought at 50 cents, 2600X in ESI. Volume exceeds open interest in both contracts and this spread pays off if shares fall below $77 through the June expiration, which is at the end of the week.

Bearish flow also surfaced in Novagold Resources (NG), Allscripts (MDRX), and China Yuchai (CYD).

Index Trading
CBOE Volatility Index (.VIX) seized higher ground today. The market's "fear gauge" gained .75 to 19.61 and closed at its highest levels since late-March. VIX is moving higher in June amid worries about the domestic economy, as well as the ongoing European Debt Crisis. VIX started its climb Monday morning on news Standard & Poor's lowered its credit rating for Greece and warned that a default is becoming more likely. The expiration might be affecting VIX as well. Options on the volatility are unique because they expire on a Wednesday and the last day to trade the June contract is tomorrow.

ETF Action
Trading was brisk in the Financials Select Sector ETF (XLF). The fund, which holds all of the financial-related names from the S&P 500, added 15 cents to $14.98. 111,000 calls and 165,000 puts traded in the XLF. The top trade of the day was a buyer of 35,000 September 15 puts at 75 cents per contract. The same investor also sold 20,000 September 16 puts at $1.34 per contract. This massive 4X7 put ratio spread is possibly a roll - or closing out a position in the in-the-money Sep 16 puts to open a new larger position in the Sep 15s, which are at-the-money. An institutional investor is possibly implementing the trade as a hedge.