Market Waiting for Earnings Kick-Off 04-08-2011

Cusick's Corner
Resistance is often strong after a big move. This market is now waiting for earnings season to kick off. Take a look at your portfolio, asses which stocks have earnings coming up and what sectors they are in, plus if their peers will start to announce earnings. That way if there are any ripples, you can be ready to react with a plan. The unofficial earnings season kicks off with AA on Monday night, so take the weekend to review your portfolio and any locate potential risk or opportunity. See you After Hours.

Stock market averages suffered modest losses on a day of rallying crude oil prices and a looming government shut-down Friday. The only economic stat released today was a report on Wholesale Inventories, which showed an increase of 1 percent in February and in-line with economist estimates. Meanwhile, crude oil added another $2.82 to $113.12 a barrel and gold rose $16.70 to another record of $1476 an ounce. A lot of investor focus is also on happenings in Washington and whether or not the government can avert a shut-down before the weekend. The deadline is midnight tonight and, if a resolution isn't reached, the government will shutter all of its "non-essential" operations. The economic implications are difficult to measure, but the uncertainty seemed to weigh on sentiment late Friday. After trading steady into midday, the Dow Jones Industrial Average came under pressure in the second half of trading and fell as much as 88 points. However, the sell-off never gathered any momentum and the Dow bounced higher into the close. At the end of the day, the industrial average was down 29 points and the tech-heavy NASDAQ had lost 15.7.

Bullish
Supervalu (SVU) has seen two days of increased options action ahead of earnings. 12,000 puts and 2,720 calls traded in the grocery chain yesterday. April 8 puts were the most actives. Sentiment seemed to shift today, however, as shares gained 35 cents to $9.42 and volume was 11,000 calls/1,435 puts. January 12.5 calls, which are 32.7 percent out-of-the-money and expire in early-2012, were the most actives. 3,120 traded. April 9, April 10 and January 10 calls were busy as well. It appears that some investors are bracing for volatility in Supervalu ahead of earnings. The company is due to report on April 14, which is the day before the April options expiration Friday.

Bullish trading was also seen in Pan America Silver (PAAS), Anglo Gold (AU), and Expedia (EXPE).

Bearish
Puda Coal (PUDA) had a rough week. Shares lost $3.10 to $6 Friday and gave up 50.8 percent on the week. Today's sell-off was apparently related to a negative newsletter mention about the Chinese coal producer. For whatever reason, shares plummeted to fresh 52-week lows and options volume rose to 12X the normal levels. 31,000 calls and 46,000 puts traded on PUDA. April 6 puts, which are now at-the-money with five trading days of life remaining, were the most actives. 7,185 traded. April 5, 7, 8, and 10 puts were actively traded as well. It seems that investors were scrambling to buy short-term PUDA puts in reaction to the volatility in shares of the coal producer this week.

Bearish flow also surfaced in Hertz (HTZ), Sherwin Williams (SHW), and JetBlue (JBLU).

Index Trading
Overall volume in the index market remains light, but is likely to pick up next week due to the expiration. 584,000 calls and 551,000 puts traded across the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX), and other cash indexes today, which is only 88 percent of the recent average daily volume, according to Trade Alert data. Meanwhile, VIX hit a low of 16.51, but finished up .76 to 17.87 after stocks faced a bit of selling pressure later in the day Friday. Another index product that did see increasing volume is the Mini-NASDAQ 100 Index (.MNX). The index is equal to the NASDAQ 100 Index (.NDX) divided by 10 and lost 1.17 to 232.17 today. MNX options volume rose to 3X the typical levels after more than 7,000 calls traded in the index. Most of the action was in the April 227.5 and June 232.5 calls. It appears to be rolling activity. That is, an investor was closing out positions in the in-the-money April calls ahead of the expiration and buying a new bullish position in out-of-the-money June 232.5 call options.

ETF Action
SPDR Energy Fund (XLE) saw increased options action today. The exchange-traded fund, which holds shares of all the energy-related companies from the S&P 500, gained 28 cents to $79.72 after crude oil rallied another $2.82 to $113.12 a barrel. Meanwhile, 110,000 puts and 56,000 calls traded in XLE today. The top trade of the day was a block of 27,700 May 75 puts that traded at the $1 asking price. The next biggest trade is a 17,700-contract block of September 72 puts at the $2.50 asking price. These trades look like massive purchases of out-of-the-money puts. An institutional investor looking to hedge their exposure (protect recent gains) in the energy sector might have initiated the XLE put purchases today.