Is the Market Entering the Bermuda Triangle? 03-01-2011

Cusick's Corner
Buck bounces after Bernanke's testimony and Oil pulls back from $100. This market is entering what I might refer to as the Bermuda Triangle -- moderate volatility, 50/50 short-term sentiment, Put/Call Ratio 1.074 (OEX). Front month volatility, as measured by VIX, is currently 20.31 and just below the median of the index at 21.41. My experience is that when volatility is at these levels you have two potential choices, sell the underlying or buy the underlying outright. If you are neutral, well, watch re-runs of Two-and-a-Half Men, Charlie is going to need the money. It looks like longs could be looking to stash some cash for a dip and the shorts may be getting some momentum from oil and are taking full advantage. With Crude inventories due out tomorrow and the start of employment data, ADP, the market just might have more reasons to raise some short-term cash. Watch 1275 on the March S&P futures, if this breaks, the shorts could have solid momentum. We are challenging 1300 as I write -- see you Midday.

The month of March is off to a volatile start on Wall Street after crude oil bubbled more than $3 higher. Some of the focus was on Federal Reserve Chairman Ben Bernanke early Tuesday. In testimony to the Senate Banking Committee, Bernanke warned that a sustained period of high oil prices could derail the economic recovery. Meanwhile, crude was rallying on reports Iran was cracking down on protestors and the Saudi's were moving tanks to Bahrain. Crude was up $1.95 to $98.92 a barrel at midday and more recently up $3.16 to $100.16 a barrel. Meanwhile, the day's economic news was mixed. Construction Spending fell .7 percent in January, which was .1 percent worse than expected. However, the latest ISM Index of manufacturing activity surprised to the upside. It rose to 61.4 in February, from 60.8 the month before and above economist estimates of 60.5. The day's stock news was light and didn't really matter too much. Instead, the focus is overseas and market volatility is rising along with crude oil prices. The Dow Jones Industrial Average lost 168 points on the session. The tech-heavy NASDAQ gave up 44.9.

Bullish
Mosaic (MOS) shares fell along with the broader market, but call activity saw a noticeable uptick in activity today. Shares lost 89 cents to $84.96. Meanwhile, 30,000 calls traded on the fertilizer company, which is about double the normal and 5X the number of puts traded. March 90 calls, which are more than $5 out-of-the-money, were the most actives. 7,120 traded. March 85, 95 and 100 calls saw interest as well. Short-term speculators were active in the name on unconfirmed speculation that BHP is eyeing the company (Briefing). It's unsubstantiated market chatter, but seems to be the reason for the increased activity in MOS call options Tuesday.

Bullish trading was also seen in Sonus Networks (SONS), Goldcorp (GG), and Alcoa (AA).

Bearish
Lorillard (LO) shares added $1.21 to $77.98 after the FDA said that menthol does not pose higher risk to smokers. Shares of the cigarette maker rallied on the news and options volume rose to more than 5X the average daily. Much of the action was driven by puts spreads. In one, the investor apparently sold the March 75 – 70 put spread at 80 cents, 4080X. In another, the strategist apparently bought 2,030 April 70 – 55 put spreads at $2.25 and another 1,250 at $2.25. Taken together, the action looks like a roll. That is, the investor closed out a position in the March put spread to open a new one in April. They might have a bearish view on LO or it's a shareholder looking for a short-term hedge might have extended the protection an additional month.

Bearish flow also surfaced in Cummins Engines (CIM), Linear Tech (LLTC), and Coach (COH).

Index Trading
The CBOE Volatility Index (.VIX) finished the day up 2.66 to 21.01 on a volatile day for the financial markets today. VIX remains below the high of 22.32 set mid-week last Wednesday. Still, the volatility index is up almost 28 percent since February 18, as escalating civil unrest in North Africa and the Middle East is raising concerns about the global economic backdrop and the risk to corporate earnings from rallying crude oil. Yet, while VIX is high, there are no signs of excessive pessimism or fear. Today, for example, 495,000 calls and 651,000 puts traded on the S&P 500 Index (.SPX) and other cash indices, which is only 96 percent the 22-day average daily volume, according to Trade Alert. If there was truly a lot of fear and negativity in the market, volume in the index puts would rise because institutional investors would be scrambling to buy downside portfolio protection. There is no sign of that, yet.

ETF Action
The top options trade in the exchange-traded funds Tuesday was in the SPDR 500 Trust (SPY). The so-called “Spyders” finished the day down $2.22 to $130.93 and a block of 50,000 April 118 puts traded on the 70-cent bid. It was part of a sale of 70,000 contracts at 72 cents, according to a source on the exchange-floor. The same investor also sold 25000 May 122 puts at $2.05 and bought 50000 May 127 puts at $3.25. The position in May 127 puts look opening because volume exceeds open interest. The other two might close existing position and so this might be an adjustment. That is, they were closing out the May 122 and April 118 puts, which are fairly deep out-of-the-money, and opening new position in the May 127 puts, which are 3 percent out-of-the-money.