Watch the Zig-Zag 05-17-2011

Cusick's Corner
I do not like what I see -- too many stocks are slicing through mid-term support, 50 SMA, and the sector rotation is very defensive. In full disclosure I am working, not in yet, a neutral/bearish ratio spread in the S&Ps. The Bulls are on watch, neutral positioning that has some bearish potential might not be the worst idea at this stage. For those of you who are positioned on the long side, adding some put exposure might be a prudent strategic option. Technicians are starting to sense that the May 2nd high, 1373.50 in the June Future, may be the top of this current upside trend. That may be confirmed if we get a deeper pullback through the trendline, between 1309 and 1305 in the June S&P future. See you After Hours.

Stock market averages are under pressure on earnings news and disappointing housing data. Hewlett Packard (HPQ) is down 8.1 percent and the biggest loser in the Dow Jones Industrial Average after the computer giant reported earnings that beat analyst estimates, but then issued disappointing forward guidance. Dow component Walmart (WMT) is also seeing post-earnings weakness. However, Home Depot (HD) gained 1.4 percent after the home improvement retailer reported profits that topped expectations. On the economic front, the news disappointed. Housing Starts fell to an annual rate of 523K in April, which was down from 585K the month before and significantly worse than the 563K that economists had expected. A separate report showed Industrial Production unchanged in April. Economists were expecting an increase of .5 percent. Meanwhile, the dollar index is up .2 percent. Crude oil lost $1.10 to $96.27 per barrel and gold gave up $12 to $1,478.60 an ounce. The Dow Jones Industrial Average is down 148 points and falling to session lows. The tech-heavy NASDAQ lost 17. CBOE Volatility Index (.VIX) edged up .19 to 18.43. Trading in the options market is busy and clearly more defensive, with 6 million calls and 5.7 million puts traded through 12:30pm ET.

Bullish Flow
Hewlett Packard (HPQ) shares are under pressure after the computer maker pre-released its earnings numbers. The company was scheduled to report after the closing bell on Wednesday, but the results were announced Tuesday before the opening bell. While the EPS number beat expectations, shares sold off on disappointing guidance for the current quarter. Shares touched new 52-week lows and are down $3 to $36.80. Options in H-P are very heavily traded. 139,000 calls and 120,000 puts so far. January 35 calls, which are $1.60 in the money, are the most actives. 35,800 traded, including a purchase of 12,000 at $4.60. May 37 calls, which are 20 cents out-of-the-money and expire at the end of the week, are busy as well. 16,940 traded. Some investors might view today's decline as an overreaction and are buying H-P calls on the weakness.

GE is down 16 cents to $19.60 and the January 20 straddle on GE is apparently sold at $3.49, 10000X. That is, the investor apparently sold 10,000 GE January 20 calls at $1.38 and sold 10,000 January 20 puts at $2.11. The position is not necessarily bullish or bearish, but a bet that GE will hold in a range through January 2012. The max profit happens if shares settle at $20 at the expiration and both puts and calls expire worthless. In that case, the strategist keeps the credit. The range of profitability is equal to the strike price of the straddle plus and minus the credit, or $16.51 and $23.49.

Bearish Flow
Natural gas producer Chesapeake Energy (CHK) is down 56 cents to $29.06 after a regulatory filing showed activist investor Carl Icahn reducing his stake in the company from more than 20 million to only 2 million shares. Meanwhile, in options action, volume in CHK equals 15,000 calls and 39,000 puts. The January 17.5 puts, which are currently 40 percent out-of-the-money, are the most actives. 25,840 traded, including a block of 24,400 traded at the 45-cent asking price. Looks like a deep OTM put buyer opening a new position.

A massive put butterfly spread trades in the SPDR 500 Trust (SPY) today. Shares are down 46 cents to $132.73 and one investor sold 80,000 August 126 puts at $2.70. They also bought 40,000 August 132 puts at $4.60 and bought 40,000 August 120 puts at $1.60. Therefore, they initiated a substantial August 120 - 126 - 132 put butterfly spread, selling the 126s for the body and buying half as many 132s and 120s for the wings. It's a bearish play, possibly a hedge, as it makes its best profits if shares fall to $126 through the August expiration, which represents a decline in the S&P 500 of about 5.1 percent.

Unusual Volume
Hewlett Packard (HPQ) options volume is running 7X the (22-day) average, with 254,000 contracts traded and call volume accounting for about 54 percent of trades.

Dell Computer (DELL) options volume is 3X the average daily, with 121,000 contracts traded and put volume representing for 67 percent of the activity.

Kinross Gold (KGC) options volume is running 4X the average daily, with 62,000 contracts traded and call volume accounting for 80 percent of the activity.

Increasing options activity is also being seen in Huntsman (HUN), General Mills (GIS), and Ciena (CIEN).

Implied Volatility Mover
Focus Media (FMCN) implied volatility is easing, as shares try to stabilize after a five-day 13.1 percent slide. Shares are up 2 pennies to $32.11 and options volume is 2.5X the average daily. 15,000 puts and 3,400 calls traded on the Chinese digital media company. June 30 and 31 puts are the most actives and might be seeing some premium selling, as implied volatility has eased 8 percent to 49. The company announced today that it will announce earnings on May 24.