Market is Damaged -- Levels to Watch 06-02-2011

Cusick's Corner
No surprise that the market finished at breakeven. The data tomorrow, Unemployment, will be scrutinized and a lot of investors will then find out how much of that selling from the previous session was in front of what could be a bad number. The reality is that this market is damaged. If you are a bull and want to see a level broken to the upside -- watch 1318 on the S&Ps, but remember that you then want to see some conviction. We could see a bounce tomorrow early but if stiff resistance comes in at the level mentioned above and turns, watch the 1300 level. If that level breaks, the potential to hit 1275 is real. See you Midday.

Stock market averages finished mixed Thursday. After a 280-point loss for the Dow Jones Industrial Average Wednesday, the underlying tone remained cautious Thursday morning. Economic data was in focus after the Labor Department reported that jobless claims declined by 6,000 to 422,000 in the final week of May. Economists were looking for a drop to 413,000. Meanwhile, first quarter productivity increased by 1.8 percent, which was .2 percent better-than-expected. A third report released later showed factory orders falling by 1.2 percent in April, which was slightly worse than the 1 percent decline that was expected. The data had little market impact and stock market averages bounced at the open. Sellers returned mid-morning, however, after Moody's said it was putting up for review the ratings of several large US banks. News that a New York prosecutor subpoenaed Goldman Sachs (GS) also weighed on the financials. Meanwhile, bonds fell later in the day after Moody's also warned that the US credit rating could be cut. Yet, stock market averages held steady in afternoon trading and ahead of key jobs data due out Friday morning. The Dow Jones Industrial Average closed down 41 points, but the tech-heavy NASDAQ added 4 points.

Bullish
Bank of America (BAC) options were heavily traded. Shares came under fire in morning trading after Moody's warned it is putting up for review the ratings of BofA, Citigroup (C) and Wells Fargo (WFC). Bank of America shares hit a morning of $11.08, but then bounced higher to close the day up a nickel to $11.29. In options action, 256,000 calls and 194,000 puts traded on the bank. The top trades were part of a spread in the long-dated 2013s. In this spread, the investor bought 17,500 January 12.5 calls at $1.39 and sold 17,500 January 20 calls at 20 cents. Therefore, $1.19 was paid for this out-of-the-money Jan 12.5 - 20 call spread and this investor might be taking the position on the view shares will rally through the second half of 2011 and in 2012. The breakeven at the 2013 expiration is at $13.69 per share, or 9.5 percent above current levels.

Bullish trading was also seen in Brocade (BRCD), Delta Airlines (DAL), and Corinthian Colleges (COCO).

Bearish
Ford Motor (F) shares lost a nickel to $14.18 and are down 5 percent in the past two days after monthly sales numbers released Wednesday fell short of expectations. In options trading today, 75,000 puts and 68,000 calls traded in the automaker. The biggest options trade of the day was a 38,500-contract block of June 14 puts that traded at the 22-cent asking price. At the end of the day, more than 50,000 traded and might be closing trades, as open interest in the contract is 118,000. Or, it might be an opening put purchase on concerns Ford shares will roll below $14 over the next two weeks. June options expire in 15 days.

Bearish flow also surfaced in Arch Coal (ACI), Life Technologies (LIFE), and Knight Capital (KCG).

Index Trading
The underlying tone of trading remains cautious after Wednesday's market rout, but there are no signs of panic yet. For example, in the index market today, 475,000 calls and 727,000 puts traded on the S&P 500 Index (.SPX), S&P 100 Index (.OEX), and other cash indexes today, which is only about 90 percent the recent average daily volume, according to Trade Alert data. Meanwhile, the CBOE Volatility Index (.VIX) hit a morning low of 17.39 before jumping to a midday high of 18.72. VIX eased in the second half of trading and finished down .21 to 18.21. The whippy action in VIX reflects choppy market conditions and the myriad of short-term uncertainties that investors now face.

ETF Action
Options on the US Natural Gas Fund (UNG) were busy today. UNG gained 41 cents to $12.16 after bullish inventory data sparked a rally in the commodity. Natural gas prices rose 15 cents to $4.78 and have now rallied 15 percent in the past two weeks. Players in the options market have taken notice. 92,000 calls and 60,000 puts traded on the ETF Thursday, which is 3X more than usual. June 12 calls were the most actives. 25,225 traded. June 11 puts and calls were actively traded as well. Some players were likely closing out positions after the recent rally in natural gas fund. June options expire two weeks from tomorrow.