Lumbering Along 12-13-2010

Cusick's Corner
Until a negative headline hits the wires, this grind up is the action of the day. For the contrarian this kind of market is a slow death and from experience should not be the course of action no matter how right you feel. One note, seeing some movement in the Lumber markets, LBF11 +2.10, which might be a signal that construction is on the mend. This is a doubled edged sword in that building costs are going up but also might be a base and potential positive move in the Housing markets – keep an eye on this segment. Also keep an eye on the Euro Currency, FXE, it has been under pressure as of late, but today is performing quite well, +1.95 on FXE. This has taken some of the pressure on the general equity markets, especially the ETF SPY which is overbought and very bullish in spite of the earlier weakness in the Euro. See you After Hours.

Stocks opened modestly higher and the major averages are sporting gains through midday. With no economic data or earnings of significance to guide the action, the early focus was on merger activity after GE announced plans to buy Britain's Wellstream for $1.3 billion and DELL made a $960 million bid for Compellent Tech. Optimism for a tax cut compromise being negotiated in Washington today seems to be underpinning the equity market as well. The Dow Jones Industrial Average is up 44 points and the NASDAQ added 1.5 through midday. The CBOE Volatility Index (.VIX) is off .58 to 17.03. Options volume is on the light side, but clearly reflects the bullish underlying sentiment, with about 5.2 million calls and 3 million puts traded through 12:30 ET.

Bullish
JDS Uniphase (JDSU) jumped after Piper Jaffray upgraded the stock and raised its price target Monday morning. The firm now rates JDSU an Outperform and expects the stock to move to $17 per share. Shares touched a new 52-week high and are up 84 cents to $14.27 midday Monday. Trading in the options market is brisk as well. 8,660 calls and 2,145 puts traded in the name so far. The top trade is a lot of 312 January 15 calls at the 28-cent ask price. 1,650 traded. December 14 and January 11 calls are seeing busy trading as well.

Options action is picking up in Best Buy (BBY) ahead of earnings. Shares have added 50 cents to $42.30 and options volume is 4X the average daily. 40,000 calls and 17,000 puts traded so far. There have been no big trades. The top trade is a lot of 246 December 40 puts on the 49-cent bid. Meanwhile, December 44 calls are the most actives. 9,900 traded and about 52 percent trading through the offer, indicating that some investors are buying short-term bullish positions ahead of the results, due Tuesday morning before the opening bell.

Bearish
Put volume is picking up in Annaly Mortgage (NLY). Shares of the New York-based Real Estate Investment Trust [REIT] are up a dime to $18.22 and the biggest trade in the name is a block of 5,000 December 18 puts at 14 cents on the International Securities Exchange. Sentiment data indicate this was an opening customer buyer. If so, it's a bearish short-term play. The contract is 22 cents out-of-the-money and December options expire at the end of this week.

Some investors are selling Citgroup (C) calls Monday morning. Shares of the bank have added 6 cents to $4.83 and, in early action, one player sold a block of 50,000 January 5 calls at 14 cents per contract. Volume in the contract is now approaching 170,000. Some of this activity is likely closing or offsetting trades. Open interest in Citi January $5 calls is more than 2.4 million and the biggest open interest position across all options contracts today.

Unusual Volume Movers
Powershares Bullish Dollar Fund (UUP) options volume is running 2X the usual, with 84,000 contracts traded and call volume accounting for 94 percent of the activity, according to data from website WhatsTrading.com.

Best Buy (BBY) options activity is running 4X the usual, with 57,000 contracts traded and call volume representing 70 percent of the volume.

Visa (V) options volume is 3X the typical levels, with 16,000 contracts traded and put volume accounting for 53 percent of the activity.

Increasing volume is also being seen in US Airways (LCC), Corning (GLW), and Apollo Group (APOL).

Implied Volatility Movers.
CBOE Volatility Index (.VIX) is making another run lower. The market's “fear gauge” hit 16.68 Monday morning and its lowest levels since April, VIX is now down .60 to 17.01 and has fallen 27.7 percent month-to-date. Since the volatility index is computed using S&P 500 Index options, it is forward-looking and its decline signals that investors expect quiet trading in the weeks ahead and through the holidays. However, Friday is also a quadruple witch expiration and so volume and volatility could see an uptick in the days ahead.