Buyers Dissipating 02-09-2011

Cusick's Corner
The close was impressive, fighting back to almost breakeven but the volume continued to be light and this has raised a flag. Prices have been moving bullish over the last 10 sessions. However, the driving force (buyers) behind this move has been dissipating over the last 4 sessions which has started to make me a little nervous, especially with the markets overbought. There is also some concern with the Emerging Markets, EEM -1.07, which have been challenged again with rising rates and inflation while the US markets continue to chug along. It is going to be interesting to see if the more developed markets pull the BRIC up or if they actually put some pressure on the US markets. There will be a lot of attention tomorrow to the Claims Data. The market will be looking for continued improvement in both Initial Claims (does it get below 415k?) and Continuing Claims (can it break 4 million?) – maybe giving a lot of employees a potential sigh of relief. See you Midday.

The Dow Jones Industrial Average battled back from early losses to record its eight consecutive day of gains Wednesday. Disney (DIS) led the Dow higher with a 5.3-percent advance after the media giant late-Tuesday reported earnings the topped Street estimates. Coca Cola (KO) also finished higher and helped the Dow on earnings news. Meanwhile, in other stock news, a number of the exchanges, like CBOE Holdings (CBOE), InterContinental Exchange (ICE), and NASDAQ OMX (NDAQ), moved higher on media reports that NYSE Euronext (NYX) and Deutsche Boerse are in merger talks. Beyond that, it was a relatively slow news day. Some attention was on Federal Reserve Chairman Ben Bernanke and his testimony on Capitol Hill. The head of the Fed basically rehashed the same concerns about high unemployment despite signs of improving economic activity. At the end of the day, there wasn't much news to move the market and the Dow Jones Industrial Average added another 7 points. The Dow has now rallied 400 points since January 28.

Bullish
NYSE Euronext (NYX) saw very heavy trading today. Shares were halted midday, news pending, and then resumed trading following news that the exchange is in advanced merger talks with Germany's Deutsche Boerse. The news triggered a flurry of activity across the sector. NXY added $4.69 to $38.10 and options volume hit 12X the average daily, with 53,000 calls and 36,000 puts traded on the exchange. March 40 calls were the most actives. 9,730 traded. Some players were apparently opening new positions in the contract, possibly hoping a merger announcement will lift shares beyond $40 through the March expiration, which is in 37 days.

Bullish trading was also seen in CBOE Holdings (CBOE), Chicago Mercantile (CME), and NASDAQ OMX (NDAQ).

Bearish
JC Penney (JCP) saw some interesting trading activity Wednesday. Shares of the retailer notched a new 52-week high and finished up 76 cents to $35.79. Options volume picked up to 2.5X the recent average daily. 24,000 puts and 11,000 calls traded in the name. The top trades included March 35 – 31 (1X2) put ratio spreads. In these trades, the investor was buying 35 puts and selling 31 puts in a ratio of 2X1. For example, a block of 2,721 March 35 puts traded at $1.40 and a block of 5,442 March 31 puts at 36 cents. The spread is a bearish play, as it reaps its max profits if shares fall to $31 by the March expiration. A shareholder looking to protect recent gains might have initiated the bearish put spreads. JCP has rallied 15.9 percent over the past four days. Focus begins to shift to earnings, due February 25.

Bearish flow also surfaced in Mindspeed (MSPD), Sara Lee (SLE), and Fortinet (FTNT).

Index Trading
There isn't much news to report from the index pits lately. The S&P 500 Index (.SPX) finished the day down 3.69 points to 1320.88. Meanwhile, CBOE Volatility Index (.VIX) hit a high of 16.52, but finished the day up just .06 to 15.87. One index that did see increasing action was the Mini-S&P 500 Index (.XSP). The index tracks the more popular S&P 500, divided by 10, and finished the day down .37 to 132.09. Meanwhile, options volume hit 4.5X the average daily, driven by apparent buyers of XSP December 90 puts. 1,682 traded and 100 percent of the volume traded at the ask. An investor looking for some “disaster insurance” might have initiated the trade. The strike price, of 90, equals 900 on the S&P 500 or 32 percent below current levels.

ETF Action
Powershares Bullish Dollar Fund (UUP) continues to see interest. Shares finished the day down a dime to $22.31 and options volume includes 45,000 calls and 5,735 puts. The top trades were two blocks (12,500X2) totaling 25,000 of January 28 calls at 10 and 11 cents. The market was 8 to 11 cents at the time. The contract saw interest yesterday as well. It looks like some investors are buying these deep out-of-the-money calls. Since UUP tracks the performance of the dollar against a basket foreign currencies like the euro, yen, and franc, it appears to be bullish trading today is in anticipation of gains for the buck through the rest of 2011.