Latest Pullback Healthy 01-04-2011

Cusick's Corner
This is healthy -- a pullback, maybe a consolidation, and then the market digests and resumes the major trend. Commodities have taken the hardest hits. If markets like Gold and Oil can hold key levels of 1325 on Gold and 85 on Oil and take a breather, look at strategies that take advantage of that type of consolidation. For example, XYZ is trading at $89 and has pulled back 2.5% after a previous 3% pop and now is stuck in a consolidation. If you now are neutral, you could sell 1 of the 91 calls at 2.20 and buy 2 of the 93 calls for .40 which is a total credit of 1.40. If the underlying stays below 91, you keep the credit. If the market picks up and is at 93, you lose $60, but if the market is at, or above 93.60, then you are breakeven or even making a potential profit. See you Midday.

Gains in overseas markets set a positive tone for morning trading, but the early rally never gathered any momentum and stocks finished mixed Tuesday. The Dow Jones Industrial Average headed higher at the open after Japan's Nikkei added 1.7 percent and UK's FTSE gained 1.9 percent. A report on Factory Orders came into focus at 10:00am ET and showed a surprise increase of .7 percent during the month of November. Economists were looking for a drop of .3 percent. The market showed little reaction to the data, however, and both the Dow and NASDAQ were underwater at midday. Stock market averages came off their worst levels in afternoon trading, however, after minutes from the latest December 14 FOMC minutes were released and didn't hold any surprises. Fed officials continue to voice concerns about the weak economy and seem unlikely to change policy action any time soon. The Dow Jones Industrial Average moved higher on the heels of the minutes and added 20 points on the day. The tech-heavy NASDAQ, however, lost 10.3.

Bullish Flow
GM shares added 84 cents to $37.80 and finished 3.3 percent off session lows after the automaker said Tuesday afternoon that December auto and truck sales rose 16 percent compared to last year. GM also said that it expects pent up demand to drive the auto industry in 2011 as well. Options volume hit 3.5X the average daily on the news, after 91,000 calls and 45,000 put traded on the day. February 40 call options traded 20000X and were the most actives. In addition, 80 percent of the volume traded at the asking price, according to data from WhatsTrading.com, which indicates that buyers were driving the order flow in GM calls Tuesday.

Bullish order flow was also seen in Mechel (MTL), Disney (DIS), and Supervalu (SVU).

Bearish Flow
Retailer Talbot's (TLB) has had a rough few weeks. Shares tumbled 22.7 percent when earnings were released on 12/7 and, after falling 44 cents to $8.07 today, have lost another 8.4 percent since that time. TLB touched a new 52-week low today. Meanwhile, options volume rose to 3X the average daily. 9,900 puts and 1,920 calls traded on the retailer. The action included a block of 3,472 February 7 puts at 20 cents each. It traded on the International Securities Exchange, where sentiment data indicate an investor bought-to-open a new position. More than 6,000 traded, compared to 644 contracts of existing open interest.

Bearish flow also picked up in NASDAQ OMX Group (NDAQ), Murphy Oil (MUR), and Eaton Corp. (ETN).

Index Trading
Put and call options on the CBOE Volatility Index (.VIX) were busy today. VIX made a run to 18.24 midday, but finished the day down .26 to 17.34. In options trading, 243,000 calls and 113,000 puts traded on the volatility index. The top trades of the day were on the put side of the options chain and included two blocks of 10,000 each (20,000) January 17s apparently sold at 30 and 35 cents, which are probably liquidating trades. 46,000 traded total. Meanwhile, January 35, March 30, and January 27.5 calls were actively traded as well. Some investors were likely buying these deep out-of-the-money calls to hedge themselves from the risk of increasing volatility in the weeks and months ahead.

ETF Trading
US Oil Fund (USO) lost 97 cents to $38.08 after crude oil gave up $2.24 to $89.31 a barrel. USO is the exchange-traded fund that tracks the price of crude oil through futures contract. The volatility in the commodity seems to have stirred up some interest in the options on the US Oil Fund. 43,000 calls and 64,000 puts traded on the ETF Tuesday. January 36, 37, 38 and 39 puts were the most actives, as some players took positions in anticipation of additional weakness in crude in the days ahead. January 2011 options expire in two and a half weeks.