Market Grind Wearing on Traders 02-04-2011

Cusick's Corner
While the market sentiment and trend is bullish, this grinding consolidation is starting to wear on traders. The market needs Financials to break consolidation in order to be in full on bull mode. Tech, QQQQ/XLK, have been leaders, but looks like put activity is picking up (see ETF Action). Lastly, all eyes are on the Middle East and Egypt. The current situation seems to be priced into the markets but any regional escalation could add volatility. Not much on the earnings and economic docket for Monday. Have a great weekend.

Stocks finished mixed in quiet trading Friday. Economic data was in focus early after the Labor Department reported that the US economy added 36,000 payrolls during the month of January. Economists were looking for an increase of 148,000. However, the unemployment rate unexpectedly fell to 9 percent, from 9.6 percent and significantly better than the 9.5 percent that economists had predicted. Average hourly earnings rose .4 percent, and twice as much as expected. Beyond that, it was a very slow news day. Some of the market's attention remains fixated on Egypt where protestors are holding a “Day of Departure” to oust President Mubarak. Unlike one week ago, however, when stocks sold off on worries about spreading unrest across the Arab world, international events had little market impact Friday. Instead, the Dow Jones Industrial Average traded in a narrow 56-point range and finished up 30 points. The tech-heavy NASDAQ added 15.4.

Bullish
Covanta Holdings (CVA), a Morristown, NJ waste management company, gained 17 cents to $17.33 and options volume surged to almost 40X the average daily levels after 14,000 calls and 175 puts traded on the ticker. June 17.5 calls traded 6,500 contracts and, with roughly 60 percent trading at the ask, it appears that buyers were dominating the action. February and March 17.5 calls saw interest as well. The unusual volume in CVA might be a play on earnings. The company reports on Wednesday of next week.

Bullish trading was also seen in Radioshack (RSH), Goldcorp (GG), and Aetna (AET).

Bearish
Texas Instruments (TXN) saw interesting options action. Shares notched a new 52-week high and finished the day up 45 cents to $35.44. Meanwhile, 22,000 calls and 2,460 puts traded on the chipmaker. February 34 puts, which are $1.44 out-of-the-money and expire two weeks from today, were the most actives. 13,535 traded and the volume included a buyer of 5,000 at 19 cents per contract, according to a source on the exchange floor. February 35 and March 34 puts were busy as well. It's not clear what was driving the put buying in Texas Instruments Friday. Shareholders looking to protect recent gains might be initiating the trades. TXN is up nearly 50 percent since early September.

Bearish flow also surfaced in United Rentals (URI), Acuity Brands (AYI), and Peabody Energy (BTU).

Index Trading
Volume was light across the index market again today. 447,000 calls and 470,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is only 79 percent of the recent average daily volume, according to Trade Alert data. The CBOE Volatility Index (.VIX) lost another .77 to 15.92 and is now a far cry from the levels seen a week ago, when the volatility index closed above 20 for the first time in almost two months. The decline comes after the S&P 500 gained 34.5 points on the week, with help from mostly upbeat earnings and economic news. These domestic stories seemed to overshadow worries about civil unrest in Arab nations, which was the main catalyst for the 24 percent one-day spike in the VIX one week ago.

ETF Action
The top options trades of the day surfaced in the PowerShares QQQ (QQQQ) around mid-session Friday. Shares of the fund, which hold the same one hundred components on the NASDAQ 100, touched new 52-week highs and finished the day up 32 cents to $57.38. Meanwhile, the big options trade of the day was a buyer of 100,000 February – March 55 put spreads at 44 cents. In this trade, the strategist bought the spread at 33 cents. That is, they bought 100,000 March 55 puts at 65 cents and sold 100,000 February 55 puts at 32 cents. This time or calendar spread might be a bet that shares will hold above $55 through the February expiration in two weeks and then move lower through the March expiration. It might also be a roll, or closing out February to open a new bearish position in March.