Market Near Critical Short-Term Levels 03-15-2011

Cusick's Corner
The market attempted to finish at its best levels of the After Hours session, but intraday traders pulled the plug on the close, taking the market down to critical short-term levels, 1275 on the June S&Ps. While scalping was the name of the game, this environment is not one to start building a new position on either side. Manage what exposure you have coming into this week and get prepared for some more volatility with expiration upon us both for options and futures. Housing Starts and Permits will be out premarket, 8:30 ET, and all eyes will be on whether the increase in production and permits continues. As I write this there are reports that the roof of Reactor 4 has potentially cracked. Hopefully there can be some safe resolution to end this tragic chain of events. See you Midday.

Stocks fell Tuesday on concerns about the economic impact from last week's earthquake and tsunami that devastated areas north of Tokyo, Japan. Deepening problems at a damaged nuclear plant and fears that dangerous levels of radiation are leaking sent Japan's Nikkei plunging 10.6 percent. Other markets in Europe and Asia moved lower as well. The Dow Jones Industrial Average followed and quickly lost nearly 300 points in early trading. However, trading was orderly into midday and a modest round of buying interest surfaced Tuesday afternoon after the Federal Reserve concluded its latest meeting on monetary policy. In the post-meeting statement, the Fed noted signs of economic improvement, but signaled no change to policy. The Dow moved higher shortly after the text was released and finished down 138 points, but 158 points from session lows. The tech-heavy NASDAQ gave up 33.6.

Bullish
Powerone (PWER), which focuses on power conversion and power management technologies, finished up 64 cents to $8.84 and options volume included 8,780 calls and 1,670 puts in the name, which is more than double the typical volume for PWER. March 9 and 10 calls were the most actives, with 2610 and 1820 traded, respectively, and about 90 percent of the volume traded at the offer. It appears that short-term speculators are buying these calls, expecting additional gains in the days ahead. Both contracts are out-of-the-money and expire at the end of the week. Alternative energy names, including solar and wind power companies, are seeing more interest this week, as the problems in Japan will likely shift resources away from development of future nuclear-power plants.

Bullish trading was also seen in GM, LDK Solar (LDK), and Tiffany (TIF).

Bearish
Aflac (AFL) shares were under pressure for a second day on worries about potential losses related to last week's earth quake. As noted in yesterday's wrap, shares lost $1.65 to $53.90 Monday and 13,000 puts traded on the insurance company. Aflac shares lost another $3.01 to $50.89 today and the options action continues. 17,000 calls and 23,000 puts traded in the name. May 55 calls were the most actives and were probably seeing some closing trades, as the contract is now $4.11 out-of-the-money and open interest is 4,433 contracts. March 48, March 50 and April 48 puts were the next most actives.

Bearish flow also surfaced in Staples (SPLS), Dish Networks (DISH), and Vishay Intertechology (VSH).

Index Trading
It was a very busy day in the index market today. 1.36 million calls and 1.22 million puts traded on the S&P 500 Index (.SPX) and other cash indexes, which is more than double the recent average daily, according to Trade Alert data. The CBOE Volatility Index (.VIX) hit multi-month highs of 25.72 and finished the day up 3.19 to 24.32. Trading in VIX options was brisk. Not only was the market very volatile and driving a lot of the action, but March options on the volatility index expire tomorrow. Today was the last day to trade the VIX March contracts. 819,000 VIX calls and 345,000 VIX puts traded on the day. May 30 calls were the most actives, with 106,850 traded and some investors likely buying these calls to hedge the risk of increasing levels of volatility in the weeks/months ahead.

ETF Action
iShares Japan Fund (EWJ) saw a surge in activity. After falling 7 percent yesterday, shares lost another 9.8 percent in morning trading Tuesday. However, shares made an aggressive rebound through midday and, at the closing bell, were down just 2 cents to $10.03. Meanwhile, a record 562,000 calls and 343,000 puts traded on the exchange traded fund. The action included a late-day buyer of 50,000 April 10 calls at 53 cents. More than 200,000 traded on the day, as some investors might see the recent plunge in Japanese equities as an opportunity to enter bullish trades on the Japan ETF.