Small Caps Move Impressive 12-29-2010

Cusick's Corner
Today's session was just like the last three, a slow grind to the upside. This move has been impressive in the Small Caps, IWM. These high beta stocks are the ones that typically show signs of growth and weakness before the Large Caps, and right now the RUT and IWN have been outpacing the general market advance. So use the Small Caps to signal a potential turning point or continuation in market trend. The reason I bring this to light is that I have had some questions about what types of barometers can be used to monitor the health of a trend outside of sentiment indicators like the Put/Call Ratios. The market's open could be volatile tomorrow with Claims data due out at 8:30am ET, followed by Crude Inventories at 10:30am ET. See you Midday.

Major averages finished with modest gains in another day of uninspired market action Wednesday. Volume remains light and there's not much volatility. A lack of news is one reason for the slow trading this week. There were no economic reports or earnings to guide the market action today. Commodities were mixed, with strength in the metals and crude oil slipping back to $91 per barrel. Trading in the bond pits was somewhat interesting. Bonds rallied on strong results from an auction of 7-years and the benchmark ten-year Treasury recaptured nearly all of the 1 5/32nd loss suffered yesterday. Its yield fell to 3.34 percent from 3.47 percent. Beyond that, there's not much to report today. The Dow Jones Industrial Average traded in a narrow 52-point range and finished up 11 points. The NASDAQ added 4.

Bullish Flow
Potash (POT) shares surged amid strength in the sector Wednesday. MOS, IPI, CF, and MON also finished with solid gains. POT touched a new 52-week high and is trading up $8.27 to $152.94 late in the session. Potash hasn't made such a volatile mover higher since BHP made an acquisition attempt of the company on August 16. In options action, 68,000 calls and 30,000 puts traded in the name, which is 4X the normal volume for the fertilizer producer. January 150, 155, and 160 calls were heavily traded. The Weeklys that expire on 12/31 with the 150 and 155 strike were busy as well. Some players appear to be taking positions on hopes the gains can continue in the days and weeks ahead. January options expire in three weeks and two days.

Bullish order flow was also seen in Sears Holding (SHLD), Noble Energy (NBL), and Qiao Xing Universal Resources (XING).

Bearish Flow
Avon Products (AVP) adds 2 cents to $28.95 and options volume is 3X the average daily, being driven by a block of 9,000 January 28 puts, sold at 25 cents per contract. The premium sale likely exits a position opened on December 8 when 9,000 were bought at 75 cents. So, this isn't really a bearish play (there aren't too many to report today). Rather, it's probably an investor that had a bearish view on AVP, but is salvaging a losing position after the stock has traded sideways in a narrow range throughout much of the past two months. Time decay has eroded the value of the puts, which are 95 cents out of the money and consist only of time value, and the position is being closed at a 50-cent loss.

Bearish flow also picked up in Novell (NOVL), Zale Corp. (ZALE), and International Game Technology (IGT).

Index Trading
There is not a lot happening in the index market due to the holidays. Many institutional investors are away and the lack of vertical movement in the market is keeping some players sidelined. It's much more difficult to trade the market when the S&P 500 Index (.SPX) makes small swings. The index added just 1.3 points today. Meanwhile, the CBOE Volatility Index (.VIX) lost .28 to 17.24. Options volume is very light, with about 280,000 calls and 185,000 puts traded across the SPX, VIX and other cash-settled indexes. The top trade of the day was a block of 44,770 January 20 puts at $1.55 asking price. Beyond that, the next biggest trade was 5000 VIX Jan 18 – 24 call spreads at $2.05. So, there are very few big trades in the index market and that also helps to explain the low overall volume totals.

ETF Trading
Financial Select Sector Fund (XLF) loses 2 cents to $15.99 and a noteworthy trade in the exchange-traded fund Wednesday is a March 13 – 15 put spread at 30 cents, 30000X in morning trading. In this strategy, the investor bought 30,000 March 15 puts at 39 cents and sold 30,000 March 13 puts at 9 cents. It's a bearish spread because it offers a max payout if shares fall to $13 by the March expiration. Since XLF holds all of the financial-related names from the S&P 500, it's possibly a hedge or maybe an outright bearish bet on the bank and brokerage stocks.