CBOE Put/Call Ratio Below .75 12-28-2010

Cusick's Corner
After the market's tight range yesterday and now again today, market watchers are taking notice of volatility's move to the upside -- specifically the VIX popping from 16 to 18. This is a little unusual considering the light volume, tight range and the offensive sectors, i.e. XLF, continue to catch a bid and show leadership to the upside. What has shaken the short-term support for the bulls is a well known sentiment indicator Put/Call Ratio, specifically the CBOE P/C Ratio is below .75. We have not seen this Ratio at that level since the beginning of November and it has been a signal for a potential turn in the short-term market segment. I am taking a contrarian perspective when looking at the P/C Ratio this way. While the market has all the momentum still clearly pointing to the upside, I keep an eye on this gauge for some potential signs of a market turn. See you After Hours.

Stocks are trading mixed in uneventful market action through midday. Economic data was in focus early after the Conference Board reported that its index of Consumer Confidence fell to 52.5 in December, from 54.3 the month before. Economists were looking for an increase to 56.1. The Dow Jones Industrial Average was already trading lower ahead of the data, showed little reaction to the report. Action in the commodities market is getting some attention, as gold has rallied to new highs and crude oil is trading higher as well. But with not much other news to guide the action, there isn't much volatility and the Dow has traded in another narrow 39-point range. The industrial average is up 3 points at midday, but the tech-heavy NASDAQ is down 8.7. The CBOE Volatility Index (.VIX) edged up .30 to 17.97. Options volume remains light, but a bit better than yesterday. 2.4 million calls and 1.6 million puts traded through 11:00 ET.

Bullish
Pfizer (PFE) shares are up 17 cents to $17.66 and PFE April 19 calls are today's most actively traded equity options contract through midday. 112,340 contracts have changed hands. Morning trades include two blocks of 40,570 contracts (X2) April 19 calls at 25 and 26 cents each. The bid and ask at the time was 24 and 26 cents. Open interest is only 572 contracts and so this is looking like an opening buyer, perhaps buying calls as a way to lock-in their right to buy the stock at $19 through mid-April 2011.

Molycorp (MCP) is rallying for a second day. Shares jumped more than 9 percent yesterday. Today, MCP notched another 52-week high and is trading up $2.72 to $52.16 on news China has increased export quotas on rare earth materials. Meanwhile, in options action, 16,000 calls and 18,000 puts have traded in MCP. January 50, 55, 60 and 65 calls are seeing brisk trading. However, the January 50 put is the day's most active. While some investors appear to be buying short-term calls to play the stock's upward momentum, others are probably buying puts to hedge or protect recent gains. MCP is now up more than 80 percent so far in December.

Bearish
Career Education (CECO) is seeing a second day of bearish trading. As noted in yesterday's closing wrap, February 17 puts were busy Monday. Today, some investors might be adding to those positions. Another 2,575 traded and, like yesterday, the volume is trading predominantly at the ask (94 percent). With shares off 33 cents to $19.95, the flow over the past two days seems to reflect some concern about the short-term outlook for the for-profit education company. Earnings are expected around February 17 and possibly before the expiration.

iShares MSCI Mexico Fund (EWW) loses a nickel to $61.22 and January puts are seeing some interest Tuesday morning. Jan 61s are the most actives. 14,940 traded. 73 percent traded at the ask, according to data from whatstrading.com website, and open interest is 623. So, it looks like buyers are opening new positions. Jan 60 puts are seeing interest as well. The overall action appears to be defensive or bearish trading on concerns about the short-term outlook for Mexico's equity markets.

Unusual Volume Movers
Pfizer (PFE) options volume is running 2.5X the usual, with 152,000 contracts traded and call volume accounting for 92 percent of the activity, according to data from website WhatsTrading.com.

MannKind (MNKD) options activity is running 5X the usual, with 134,000 contracts traded and call volume representing 63 percent of the volume.

Kraft (KFT) options volume is 15X the typical levels, with 130,000 contracts traded and call volume accounting for 99 percent of the activity.

Increasing volume is also being seen in Rare Earth (REE), Deere (DE), and Nucor (NUE).

Implied Volatility Movers
Rare Earth (REE) is rallying along with peer Molycorp (see Bullish) and implied volatility is up for a second day. Shares have added $1.58 to $13.31 and options volume is 6X the average daily. 37,000 calls and 12,000 puts traded so far. Jan 10, 12.5, 14 and 15 calls are seeing brisk trading. Meanwhile, implied volatility is up 21 percent to 100 and has gained nearly 40 percent on the week.