Watch SPX Key Support 1050 06-08-2010

Cusick’s Corner
Small Caps like the RUT and bigger sectors like Financials and Energies are continuing to pullback -- longs into the Midday are looking pretty beat up. The market action can generally be described as some small buying on new lows, then the market recovers and at the end of a session, the market just gets pounded at an accelerated pace. This buying the dip strategy has been unsuccessful, unlike in Feb/March/April, because the bid was being supported by the institutions, but not now and it looks like they are on the offer side of the market (whether it is because they have to raise cash or redemptions out of the fund). What needs to be watched closely into the close is if the market challenges key supports, 1050 on SPX, and settles below these levels into the After Hours. This could be a potential signal of further challenges to the downside. See you After Hours.

Stocks are trading mixed and the underlying market tone remains cautious on another slow news day Tuesday. The stage was set for sluggish trading as the focus remained across the Atlantic where major averages traded mostly lower across Europe. In the US, with no economic data or earnings of importance to guide the action, the Dow Jones Industrial Average extended recent losses and fell to 7-month lows in morning trading. However, the decline was orderly and the Dow had managed to battle back to higher ground by midday thanks to relative strength in DuPont (DD), Exxon Mobile (XOM), and AT&T (T). The Dow Jones Industrial Average is up 64 points, but the NASDAQ off 11 midday. The CBOE Volatility Index (.VIX) hit a high of 37.28, but is down 1.84 to 34.73. Options volume is picking up a bit, with 3.9 million calls and 4.3 million puts traded at 12:30 ET.

Bullish
CVS shares, which were pummeled yesterday after Walgreens (WAG) said it would no longer participate in CVS’ drug plans, is down another 15 cents to $30.89 and now off 8.6 percent on the week. Some investors might view the recent weakness as an opportunity for bullish trades. 23,000 calls and 9,240 puts traded through midday. The action includes 5,400 July 32 calls, which traded mostly at the asking price, and appears to be call buying in anticipation of a rebound in CVS through the July expiration.

Hecla Mining (HL) is up 20 cents to $5.30 and options volume is picking up in the January 2012 calls at the 2.5 strike. A block of 21,450 traded at $3.20 on the International Securities Exchange [ISE], where ISEE data indicate a customer bought-to-open a new position. The calls are $1.80 in-the-money and this investor might be using the calls as a cheaper way to play the stock longer-term. However, the downside is that the position will suffer from time decay. There is 70 cents of time value in the contract.

Bearish
Transocean (RIG) shares dropped to new 52-week lows and are down $4.50 to $44.67 after Goldman Sachs cut the stock to Neutral from Buy. Shares have basically been cut in half since the oil driller’s Deepwater Horizon rig sank in the Gulf of Mexico in late April. Some investors appear to be bracing for additional losses. One player bought 7,100 August 40 puts at an average of $3.125 each in morning trading. June 40 puts are seeing interest as well.

Select Sector Industrial Fund (XLI) is up 10 cents to $27.80 and 71,000 puts traded on the exchange-traded fund through midday, which is 4X normal and compares to just 1,300 call options. The top trades include a buyer of 43,000 July 26 puts, who also sold 21,500 September 29 puts. This “reverse diagonal” is a bearish short-term play, as it makes its best profits if shares fall through the July expiration and then rebound through September.

Unusual Volume Movers
Talbot’s (TLB) options volume is running 3X the usual, with 30,000 contracts traded and call volume accounting for about 79 percent of the activity.

Hecla Mining (HL) options activity is running 2X the usual, with 27,000 contracts traded and call volume representing 97 percent of the volume.

Xilinx (XLNX) options volume is running 2.5X the usual, with 14,000 traded and call volume representing 95 percent of the activity.

Baxter (BAX), MEMC (WFR), and NRG also have unusual volume.

Implied Volatility Movers
Diamond Offshore (DO) shares are down $3.93 to $55.28 and implied volatility is screaming higher after Goldman Sachs cut the stock to Sell. 21,000 puts and 8,180 calls traded on the oil drilling company through midday. Meanwhile, implied volatility is moving up to 52-week highs around 70, from about 57 the day before.