XLF Had Explosive Segments 12-01-2010

Cusick's Corner
This was an incredibly strong day across the board -- XLF had explosive segments. Plus there was a lot of rumor about the support, or not, by the Fed for the IMF. While this is not confirmed, at this stage this is that headline or emotion risk/catalyst. But if we look at the technicals in Finance, the markets are telling us that based on this price action, the trend has turned with significance -- Bullish engulfing on 11-30 then broke above $14.50. If this is holds, strength is in the bulls' corner, or if it breaks, this latest move could come under pressure. This is a quick summation of how you can read into the action of the market while trying to mute the rhetoric and rumor. Relative strength is definitely in the market. While some markets are again extended, SMH one of them, they are not to be faded at this juncture. See you Thursday.

Global equity markets rallied and stocks on Wall Street finished broadly higher Wednesday. In Europe, Spain's IBEX helped pace the advance, gaining 4.3 percent on diminishing concerns about the European Debt Crisis. Meanwhile, Hong Kong's Hang Seng added 1 percent following a stronger-than-expected reading on manufacturing activity in China. The domestic news helped as well. Before the opening bell, ADP reported that the US economy added 93,000 private sector jobs last month, which was more than the 58,000 increase that economists had predicted. The Federal Reserve's Beige Book was released Wednesday afternoon and in the report the Fed noted modest improvement in economic conditions. At the end of the day, the Beige Book didn't seem to matter much, however, because the Dow Jones Industrial Average had already ripped more than 200 points higher prior to the news. At the closing bell, the Dow was up 250 points and the NASDAQ had added 51.

Bullish Flow
BofA (BAC) saw a surge in call activity Wednesday. Shares finished up 35 cents to $11.29 and 593,000 contracts traded. The volume is 2.5X the recent average daily and compares to put volume of 237,000 contracts. January 12.5 calls were the most actives. More than 200,000 traded on the session. The activity included a massive spread in which an investor apparently bought 44,900 January 12.5 calls at 21 cents and sold 44,900 January 14 calls at a nickel. The spread, for a net debit of 16 cents, is a bullish play. At expiration, it offers a pay-off (excluding commissions), if shares are trading at $12.67 or higher, which is 12.2 percent above current levels.

Bullish options action was also seen in Tiffany (TIF), Omnivision Tech (OVTI), and Hartford (HIG).

Bearish Flow
Options volume picked up in specialty glassmaker Corning (GLW) Wednesday. Shares finished the day up 38 cents to $18.04 and 43,000 puts and 21,000 calls traded in the name. The top trade was a seller of 20,000 December 17 puts at a dime. This trade probably exits a position opened in late-October when 40,000 contracts were bought at 50 cents. Next, this same investor initiated a bearish May 17 put – 19 call risk-reversal, 15000X. They paid $1.21 per contract for 15,000 May 17 puts and collected $1.23 per contract for 15,000 May 19 calls. So, at the end of the day, it appears that they were closing a bearish position in December and opening a new bearish risk-reversal in May. It might be a move designed to hedge a position in GLW shares.

Bearish flow also picked up in Dana Corp. (DAN), BMC Software (BMC) and Owens Illinois (OI).

Index Trading
The Russell 2000 Small Cap Index (.RUT) saw more volume than usual. The index added 16.13 to 743.11 after the bulls dropped a bomb on the bears Wednesday, triggering big gains in large, mid and small cap names alike. In options action, 83,000 calls and 57,000 puts traded on the Russell, or more than double the recent average volume. The top trade was part of a spread in morning trading after 11,118 December 800 calls traded at the 50-cent asking price and 11,118 December 790 calls traded on the 80-cent bid. It looks like this (Dec 790 – 800 call) spread was sold for a net credit of 30 cents. If so, this strategist probably expects the Russell to hold below 790 (which is 6.3 percent above current levels) through the December expiration in two and half weeks. In other words, they don't expect Wednesday's dramatic run to continue through the December expiration and are collecting premium by writing out-of-the-money call spreads.

ETF Trading
An interesting butterfly spread surfaced in the Oil Service HOLDRS (OIH) today. The exchange-traded fund, which holds a basket of oil drilling names, rallied $4.04 to $134.15 after crude oil gained $2.71 to $86.82 a barrel. Meanwhile, in OIH options action, one strategist was focused on December puts. They apparently sold 19,000 December 127 puts at $1.04, bought 9,500 December 132 puts at $2.44 and bought 9,500 December 119 puts at 27 cents. This Dec 119 – 127 – 132 put fly, for a net debit of 63 cents, is a bearish bet. It makes its best profits if the oil drillers come under pressure and OIH falls back to $127 by the December expiration.