Stocks Broadly Lower on Concerns in Japan 03-15-2011

Cusick's Corner
The bid attempts a bounce into the Midday, we need to be very careful on two fronts, buying into this pullback and maintaining long positions. The longs will have to be disciplined and patient, look away from the TV, but not blind to the current conditions. What I mean is that early last week the market was already challenging the short-term trend when the 50 Day MA was breached and was pushed over with Japan. The Fed will be very measured and balanced and traders will be active. I am going to reserve the right to further comment until after the Fed. See you After Hours.

Stocks are broadly lower on concerns about the fallout from last week's earthquake and tsunami that devastated areas north of Tokyo, Japan. The primary concern now is the deepening problems at a damaged nuclear plant. Fear of radiation poisoning is spreading and, in Tokyo, the Nikkei suffered a 10.6 percent plunge today. Stock market averages moved broadly on across Asia and in Europe. When the opening bell sounded on Wall Street, the Dow Jones Industrial Average quickly lost almost 300 points. Crude oil (April) is down $2.07 to $99.12 a barrel and gold gave up $28.2 to $1396.70 an ounce. The Dow Jones Industrial Average is now down 194 points and the tech-heavy NASDAQ has given up 41. The CBOE Volatility Index (.VIX) rallied 2.45 to 23.58. Trading in the options market is very active and clearly more defensive today, with 7.4 million calls and 8 million puts traded through 12:30pm ET. Attention now shifts to the Federal Reserve Open Market Committee meeting. A statement is due at 2:15pm ET.

Bullish Flow
LDK Solar (LDK) is seeing a second day of relative strength and bullish options order flow. After gaining 8.8 percent yesterday, shares have added another 89 cents to $12.47 Tuesday. Meanwhile, today's options flow includes 19,000 calls and 4,500 puts through midday. January 15 calls are the most actives. 2,520 traded. March 12, March 13, April 12, and Sep 15 calls are busy as well. The overall flow seems to reflect bullish sentiment and expectations for a rebound in LDK shares in the weeks/months ahead. Prior to this week, shares had suffered a three-week 26 percent slide. Earnings come into play on Thursday.

The US automakers are showing some resilience today. Ford (F) is up 10 cents to $14.40 and GM has added 10 cents to $31.69. Meanwhile, noteworthy spread trading was seen in GM options Tuesday morning, as one investor was apparently selling January 25 puts to buy January 35 – 40 call spreads. The spread traded a total of 1,000X at 23 cents (credit) and seems to be a bet that shares will rally before year end. If shares fall below $25 through the January 2012 expiration, the spread trader will face assignment on the short puts and be asked to call the stock at $25. The best profits happen if shares rally to $40 or beyond.

Bearish Flow
Staples (SPLS) is seeing brisk trading today. Shares of the retailer are down 27 cents to $19.95 and options volume is 2.5X the recent average daily levels. 21,000 puts and 2,000 calls traded in the name so far. The action is heavily concentrated in September 19 puts, which have traded more than 20,000 contracts. In addition, more than two thirds traded at the asking price, suggesting that buyers are dominating the action and bracing for a possible move below $19 through the September expiration. The top trade is a 1,000-contract block at $1.50.

iShares Korea Fund (EWY) trades down $1.68 to $57.09 per share on a rough day for Asia's equity markets. Options volume includes 30,000 puts and 1,365 calls, and 7X the normal volume of the South Korea fund. March 54 puts are the most actives. 24,000 traded, as some investors appear to be bracing for additional volatility in EWY in the days ahead. March options expire at the end of the week.

Unusual Volume
HSBC (HBC) options volume is running 6X the (22-day) average, with 60,000 contracts traded and call volume accounting for 94 percent of the volume.

iShares Japan Fund (EWJ) options volume is 15X the average daily, with 507,000 contracts traded and call volume representing for 55 percent of the activity.

Metlife (MET) options volume is running 3X the average daily, with 44,000 contracts traded and call volume accounting for 558 percent of the activity.

Increasing options activity is also being seen in Boeing (BA), Cameco (CCJ), and Aflac (AFL).

Implied Volatility Mover
CBOE Volatility Index (.VIX) is rallying and options are actively traded heading into the expiration. Concern about problems in Japan has global equity markets reeling Tuesday and the CBOE Volatility Index (.VIX), which is sometimes called the “fear gauge”, is up 3.30 to 24.40. VIX hit its best levels since September today. Options volume includes 466,000 calls and 187,000 puts on the volatility index. Trading is brisk, not just because of the volatility, but because VIX options expire tomorrow. The last day to trade the March contract is today.