Good News & Bad News Challenges Market 03-02-2011

Cusick's Corner
We have a market that is challenged by good news and bad news. The good news is that the employment picture is looking better, watch for confirmation with the latest unemployment number this Friday. The bad news is that inflation appears to be growing faster than anticipated, stressing the Equity markets as well as the Federal Reserve. There are also growing fears over the health of the Finance sector, specifically Banking. The pullback over the last 3 sessions is concerning because it has some strength, XLF down from $17, which is an offensive sector that this market needs to be healthy. There also needs to be some stability in the oil markets before the bulls may be comfortable buying any dips. This may be a tough and choppy consolidation in the meantime. See you Midday.

Stock market averages finished with modest gains with help from better-than-expected jobs data, but the tone of trading remains cautious after crude oil prices continued to move higher Wednesday. According to a report released from ADP Wednesday morning, the US economy added 217,000 private sector jobs in February. Economists were looking for an increase of 165,000. The news comes two days prior to the Labor Department's key monthly report. Economists expect Friday's report, which includes both public and private sector payrolls, to show an increase of 183,000. Stocks moved higher early, but any rally attempts were held in check due to concerns about the rising impact of crude oil on future economic activity. Crude oil is trading up $2.75 to $102.38 a barrel late Wednesday. Beyond that, it was a relatively light news day. The Dow Jones Industrial Average traded in a 96-point range and finished up 9 points. The tech-heavy NASDAQ added 10.7.

Bullish
Ericson (ERIC) sees a second day of bullish trading this week. July 15 calls were active in the name Monday. Today, shares lost 7 cents to $12.48 and options volume rose to 3X the average daily, with 7,700 calls and 320 puts traded on the Swedish telecomm. The focus was again on the July calls. The 15s traded almost 6,000 contacts and 68 percent traded at the Ask. Another 1,060 July 14 calls also changed hands (92 percent Ask). Another 323 July 16 calls also changed hands. The reason for the heightened activity isn't entirely clear, as there have been no obviously bullish headlines on the ticker lately. For whatever, it looks like call buyers are accumulating positions and looking for shares to move higher through the July expiration.

Bullish trading was also seen in Fastenal (FAST), Foster Wheeler (FWLT), and American Eagle Outfitters (AEO).

Bearish
Lorillard (LO), which added $1.21 to $77.98 yesterday after the FDA said that menthol does not pose higher risk to smokers, lost 69 cents to $77.29 and today's options volume was 39,000 puts and 6,945 calls. The top trades were part of a spread, in which the investor apparently bought 5,000 March 75 puts and sold 10,000 April 65 puts at $1.91. This bearish 1X2 combo appears to be a bet that shares will fall through the March expiration, but not slide below $65 through April. If not, the investor will be on the hook to buy the stock at $65 per share.

Bearish flow also surfaced in MBIA (MBI), James River Coal (JRCC), and Omnicare (OCR).

Index Trading
It was a relatively quiet day in the index pits, with 643,000 calls and 584,000 puts traded on the S&P 500 Index (.SPX) and other cash indices, which is about the average daily volume seen in the index market lately, according to Trade Alert. The CBOE Volatility Index (.VIX) edged down .31 to 20.70 and the most active index contracts were the March and April 32.5 call options. More than 60,000 traded in both contracts, as some investors might be rolling bullish VIX calls from one month to the next. VIX March calls expire in 13 days.

ETF Action
MidCap SPDRS (MDY) added 81 cents to $173.46 and an interesting spread traded in the ETF Wednesday. In this trade, the investor bought 7,000 March 170 puts at $2 and sold 14,000 Mar 166 puts at $1.13. They collected 26 cents on this 1X2 put ratio spread and, with volume exceeding open interest in both contracts, the action looks like a new position. If so, it's a bearish short-term market bet or possibly a hedge. MDY tracks the S&P 400 Mid-Cap Index and this trade offers a max-payoff if shares of the fund fall to $166 by the March expiration, or 4.3 percent in the next 16 days.