Volatility Is Back & Complacency Is Challenged 02-22-2011

Cusick's Corner
This was clearly a seller's day. Profits were booked early and then later in a muted rally attempt into the afternoon. While this did not feel like a panicked-filled sell session, the tone or should I say the volatility changed, creating a bigger window for traders (specifically intraday traders) to get some action. This market looks like it will need some time to work out all the headlines before a definitive direction will emerge. Crude will be traded on the upside as long as revolution looms. The fundamentals in the States stay strong until the potential of $4 gas becomes a reality for a sustained time, stressing out the consumer. In the end we will have to monitor the technicals (as I noted in the Midday) to see how the health of the markets and the general trends are doing. With Crude on the move, if there is any production stoppage due to conflict, watch industries that are fuel reliant (airlines, auto) as pressure mounts. I would also keep an eye on mid- and long-term support levels on the major indices -- 1300 on the SPX would show greater potential weakness than expected in a headline ridden, over bought market. Volatility is back and the complacency to the upside is being challenged, trade accordingly. See you Midday.

Stock market averages opened lower and never recovered. The focus early was mostly overseas, as crude oil prices rallied on supply fears following growing unrest in Libya, the world's 18th largest oil producer. Equity markets fell across Asia and Europe before the bell opened on Wall Street. Meanwhile, Walmart (WMT) was among the biggest losers in the Dow Jones Industrial Average after the retailer reported earnings that topped Street views, but revenues fell short of expectations. The economic news was mixed. Data released early showed the Cash-Shiller 20-City Index of home prices falling 2.4 percent in December. A separate report released later showed the Conference Board's Consumer Confidence Index up to 70.4 in February, from only 64.8 the month before. At the end of the day, the strong consumer confidence number failed to trigger a meaningful market reaction. Instead, the Dow Jones Industrial Average fell on worries about spreading civil unrest and lost 178 points on the session. The tech-heavy NASDAQ gave up 77.5 points.

Bullish
Carnival Cruise (CCL) shares sank $3.61 to $42.09 and options volume rose to 6.5X the average daily, with 9,790 calls and 6,920 puts traded on the cruise ship operator. While April 39 and 42 puts were actively traded, July 47 calls were the most actives. More than 4,000 contracts changed hands and the action included a morning buyer of 2,140 contracts at $1.90 each. Both CCL and peer Royal Caribbean (RCL) traded lower early on worries about the impact of the Middle East unrest on the industry. This morning's buyer of July 47 calls might view the weakness as an opportunity to take a bullish position in the name. However rather than buying the stock, they're taking a position in the July 47 calls and, by doing so, putting less capital at risk.

Bullish trading was also seen in Delta Airlines (DAL), Marathon (MRO), and Clean Energy Fuels (CLNE).

Bearish
Pre-earnings action picked up in Iron Mountain (IRM) today. Shares of the Boston-based business software company lost 75 cents to $26.38 and options volume hit 6X the 22-day average daily volume. 3,670 puts and 290 calls traded in the name. The top trade was 885 Mar 27.5 puts at the $1.55 asking price. Beyond that, most of the action was in smaller lots and focused on March 25 and 27.5 puts. Implied volatility jumped 11 percent to 39 and the bearish trading in IRM comes two days ahead of its earnings results.

Bearish flow also surfaced in Ford Motor (F), Walter Investment Management (WAC), and SM Energy (SM).

Index Trading
The CBOE Volatility Index (.VIX) jumped today. The market's so-called “fear gauge” added 4.30 points to 20.80 and moved to levels not seen since early December. Trading in VIX options was brisk, with 312,000 calls and 194,000 puts traded on the volatility index. In fact, volume was heavy throughout the index market. In the S&P 500 Index (.SPX) options pits, for example, 493,000 puts and 197,000 contracts changed hands. Since VIX tracks the expected volatility priced into SPX options, it often moves higher when portfolio managers begin buying S&P 500 puts for portfolio protection. Today was no exception.

ETF Action
US Oil Fund (USO) option volume surged as crude oil (April) rallied $5.56 to $95.27 a barrel. USO, which is the exchange-traded fund that tracks crude through futures contracts, surged $2.13 to $38.49 and options volume rose to 2.5X the average daily. 217,000 calls and 87,000 puts traded in the USO. Meanwhile, the ProShares Ultra Crude Oil Fund (UCO), which is a leveraged play on the commodity, gained 94 cents to $11.76. Options volume in UCO hit 5X the average daily, with 31,000 calls and 4,960 puts traded on the exchange traded fund.