Can Market Pull a Nowitzki? 06-03-2011

Cusick's Corner
Can the market pull off a Nowitzki? (This is the name of Dallas Maverick's German Center, in reference to their roaring comeback in game 2 of the NBA finals.) The long and short of it is that I am going to be watching the 1313 level, plus want to see a break and settle above this number, giving a little more confidence into the weekend. While this does not remove the Bearish pressure, it takes the flush factor out of the After Hours and early Monday trade. See you After Hours.

Stock market averages fell on disappointing jobs data Friday morning. Before the opening bell on Wall Street, the Labor Department reported that the US economy added just 54,000 jobs in May. Economists were looking for an increase of 169,000. April numbers were revised down to 232,000 from 244,000. Meanwhile, the unemployment rate edged up to 9.1 percent from 9.0 percent. Economists were expecting the rate of unemployed to hold steady at 9.0 percent. Average hourly earnings showed an increase of .3 percent, and .1 percent more than expected. Trading was volatile when the stock exchanges opened. Then, the ISM Services Index was released at 10:00am ET and showed an increase to 54.6 in May, from 52.8 the month before. Economists were looking for the gauge of economic activity outside of manufacturing to increase to 53.3. The Dow Jones Industrial Average was climbing off session lows when the ISM was released and moved to session highs forty minutes later. Still, the industrial average is down 62 points on the disappointing jobs data. The tech-heavy NASDAQ lost 18. The CBOE Volatility Index (.VIX) gave up .58 to 17.51 now that the event risk (employment report) has passed. Meanwhile, it's a busy morning in the options market and trading is defensive, with 3.8 million calls and 4.2 million puts traded through 12:00pm ET.

Bullish Flow
AK Steel (AKS) options are heavily traded today. Shares are up 26 cents to $15.05 and total options volume through midday is 7X the normal levels. 42,000 calls and 7,790 puts have changed hands in the steelmaker so far. June 16 calls are the most actives. 18,210 traded. The contract is 6.3 percent out-of-the-money and expires in two weeks. June 15 and 17 call options are busy as well. Speculators are active in the stock on unsubstantiated talk that the steelmaker has backed out of a conference, which appears to have triggered a flurry of merger and acquisition speculation.

SPDR Utility ETF (XLU), which is an exchange-traded fund that holds all of the utility names from the S&P 500, is down 8 cents to $33.34. In options action, one investor bought a 5,000-contract block of July 34 call options at 20 cents per contract. Total volume is now 13,387 against only 919 in open interest. The contract is 2 percent out-of-the-money. Today's investors appear to be buying-to-open new positions in the contract on hopes for a rally in the utility sector before the July expiration, which is in 42 days.

Bearish Flow
AMR shares are up 2 cents to $6.05 Friday, but prior to today the stock had suffered a two-week 9.2 percent slide. Options on the airliner are seeing noteworthy volume today. The activity includes 46,000 puts and 6,910 calls. One investor is responsible for a bulk of the activity. They bought 40,000 January 4 puts and paid as much as 28 cents per contract. These puts are deep (33.9 percent) out-of-the-money and therefore today's premium buyer seems to be bracing for a big drop in AMR shares in the months ahead. A shareholder might have initiated the trade to hedge stock.

A substantial butterfly spread trades in Medco Health Solutions (MHS). Shares are down $1.36 to $58.23 and have now fallen nearly 10 percent since April 27, when shares tanked on news rival CVS had won an important Regence Blue Cross/Blue Shield government-wide pharmacy benefit plan contract. In option action, one investor sold the July 60 - 65 - 70 call butterfly spread at 75 cents, 12000X. 24,000 July 65 calls were bought for the body of the fly, and 12,000 of both the 60s and 70s were sold for the wings. The trade likely exits a position opened in mid-March when the same spread traded at $1. The strategist is possibly giving up hopes for a rebound in the stock and taking a 25-cent loss (per spread) on this call butterfly

Unusual Volume
Arch Coal (ACI) options volume is running 6X the (22-day) average, with 123,000 contracts traded and call volume accounting for about 74 percent of trades.

Oracle (ORCL) options volume is 2X the average daily, with 67,000 contracts traded and call volume representing for 71 percent of the activity.

Apollo Group (APOL) options volume is running 5X the average daily, with 53,000 contracts traded and call volume accounting for 53 percent of the activity.

Increasing options activity is also being seen in DR Horton (DHI), Genworth (GNW), and Arch Coal (ACI).

Implied Volatility Mover
Implied volatility in EBIX.com (EBIX) options is moving higher today. Shares are down 9.7 percent to $16.87 and puts on the software maker are heavily traded. 8,150 traded, which is almost 20X the normal and compares to call volume of 1,755. Meanwhile, implied volatility in EBIX options surged 70 percent to 75. No news on the stock today. Shares have now tumbled 44.4 percent since mid-March, when the stock was the subject of a negative blog post related to the company's accounting and financial statements.