Tech Rebalanced 04-05-2011

Cusick's Corner
This is one of those markets -- what you think you see is really not real at all, most notably is the news that the NASDAQ has decided to reweight AAPL in the index, which can explain why AAPL has had such a persistent seller. Also, in the Semis, SMH (mentioned last night) -- TXN bought NSM for a huge premium, negating the rhetoric that the tech and chips are too far behind the cycle to catch up with the going tablet industry. Lastly, notes from the FOMC Meeting on March 15th show that members are split on whether to hold easy money beyond this year or move to tighter money conditions earlier in this year. Some officials are also concerned about inflation; however most members concluded that the price increases may be more temporary. Speaking of inflation, optionsXpress will have special guest David Hightower online tomorrow Wednesday, April 6th at 3:30pm ET. David Hightower will talk about inflation in his presentation "Big Events in 2011 That May Enhance Global Inflation Threat." https://oxps.webex.com/oxps/onstage/g.php?t=a&d=924044240. See you After Hours.

Stock market averages shook off early weakness and are moving higher midday. Trading was mixed early and then a modest round of selling interest surfaced thirty minutes into trading after the Institute of Supply Management [ISM] said that its Services Index, which tracks economic activity outside of manufacturing, fell to 57.3 in March from 59.7 the month before and worse than the 59.5 that economists had expected. Stock market averages remained lower after the Republican Party unveiled a budget plan that includes $6.2 trillion in spending cuts. Yet, the selling never gathered any real momentum and instead a round of buying interest surfaced heading into midday. The Dow Jones Industrial Average is now up 26 points. The tech-heavy NASDAQ gained 11.5 after Texas Instruments made a bid for LSI, giving a boost to the semiconductor sector Tuesday. The CBOE Volatility Index (.VIX) slipped .76 to 16.74. Overall options volume is picking up from yesterday's slow pace, 4. 5 million calls and 3 million puts traded through 12:15pm ET.

Bullish Flow
Tyco International (TYC) is seeing relative strength and increasing call volume Tuesday. Shares touched a new 52-week high early and were recently up $1.53 to $47.70. Meanwhile, total options volume is running 11X the average daily. Approximately 15,000 calls and 1,500 puts traded in the Swiss-based diversified machinery and safety products company. April 50 calls, which are 4.8 percent out-of-the-money and expire at the end of next week, are the most actives. 1,890 traded. April 49, May 47, May 48, May 50 and June 50 calls are seeing interest as well. There's takeover talk in TYC. It's unsubstantiated market chatter, but seems to be the catalyst for the stock and the heavy call volume in TYC today.

iShares Emerging Markets Fund (EEM) is notching new 52-week highs near $50 per share today. EEM is now up $1.58 to $47.75 and one investor sold the April 50 - 52 call spread at 46 cents, 100,000X. The same investor also bought the May 51 - 53 call spread at 58 cents, 100,000X. These massive spreads are probably part of one position adjustment. That is, the investor is selling to close 100,000 April 50 - 52 call spreads ahead of next week's expiration and opening a new similar bullish position in the 51- 53 call spread that expires in May.

Bearish Flow
Microsoft (MSFT) adds 37 cents to $25.92 after NASDAQ OMX Group (MSFT) announced plans to reshuffle the NASDAQ 100 Index (.NDX). MSFT, Oracle (ORCL) and Intel (INTC) are trading higher on the news, Apple Computer (AAPL), which will see its overall weighting cut within the index, is moving lower. Meanwhile, in Microsoft (MSFT) options action, a noteworthy trade today is a January 25 - 30 bearish risk-reversal that traded at $1.37, 13000X. In this combo, the investor sold the January 30 calls and bought the January 25 puts. A shareholder looking to protect or "collar" Microsoft shares might have initiated the position. Or, it's maybe a closing trade because substantial open interest already exists in both contracts.

Anadarko Petroleum (APC) shares add 31 cents to $83.08 and 13,000 puts have traded in the oil service company so far. May 57.5 puts are the most actives and includes a buyer of 6,000 contracts at 18 cents each. 7,000 have changed hands and, since open interest is 2,285, this looks like opening put buying - i.e. new positions. The contract is more than 30 percent out-of-the-money and a shareholder might have initiated the position as a hedge. APC touched a new 52-week of $84 last week and has rallied 142.6 percent since the lows of June 2010 after the Gulf spill.

Unusual Volume
Abercrombie (ANF) options volume is running 5.5X the (22-day) average, with 42,000 contracts traded and call volume accounting for about 54 percent of trades.

Atmel (ATML) options volume is 11X the average daily, with 36,000 contracts traded and call volume representing for 99 percent of the activity.

Valeant Pharmaceuticals (VRX) options volume is running 6.5X the average daily, with 30,000 contracts traded and call volume accounting for 67 percent of the activity.

Increasing options activity is also being seen in National Semiconductor (NSM), Aruba Networks (ARUN), and Medtronic (MDT).

Implied Volatility Mover
Duoyuan Global Water (DGW) is seeing another day of increasing options volume and higher implied volatility. Shares lost 27 percent yesterday after a research firm warned that the company might have filed misleading financials. Today, DGW is down another 20.4 percent to $3.14 on news the company's CFO has resigned. Options are seeing heavy trading, with 9,560 puts and 2,705 calls traded in the name so far. Implied volatility is up another 9 percent and very elevated at 232.