May Be Running Out of Bulls 01-03-2011

Cusick's Corner
Happy 2011 and boy does this market seem happy. This is the time when you really need to be on your toes, do not get complacent. Market sentiment is not a timing tool, but rather a tool to help us gauge the progress of a trend and monitor if a trend is getting a little extreme. In a strong trend these indicators can stay at extremes for awhile and the last time that we had action like this was in late 2009 into 2010. This is why I have been advocating the need to watch the complacency in the market (we may be running out of bulls) and now we have to focus on the charts for some timing. Keep an eye on the Volatility Index, if the VIX pops above 24-25 then fear could be entering the market. See you After Hours.

Major averages are off to a solid start in 2011, as stocks rallied around better-than-expected economic data Monday morning. A report released Monday morning showed the ISM index of manufacturing activity increasing to 57 in December and for a 17th consecutive month. Separate data from the Commerce Department showed construction spending up 0.4 percent in November, and twice as much as expected. Meanwhile, BofA (BAC) is rallying around news of a settlement with Freddie and Fannie. BAC is one of 28 Dow stocks moving higher and the industrial average is up 125 points midday. The tech-heavy NASDAQ added 43. The CBOE Volatility Index (.VIX) slipped .44 to 17.31. Options volume is picking up from last week's anemic pace, with 5.6 million calls and 3.7 million puts traded through 11:30 ET.

Bullish
Bank of America (BAC) is rallying after the company announced settlements with Freddie Mac and Fannie Mae. Shares are up 5.3 percent to $14.04 and the best gainers in the Dow Jones Industrial Average. Meanwhile, BofA options are heavily traded. 417,000 calls and 217,000 puts have changed hands through midday. January 14 calls are the most actives. 89,625 traded. These calls are now at-the-money and 56 percent of today's volume has traded at the ask, indicating that some investors are buying premium and using options instead of shares to play BAC for a move higher in the weeks ahead. January 2011 options expire in 18 days.

Baker Hughes (BHI), the oil driller, hit a new 52-week high and is up 60 cents to $57.77 midday. Options volume is 3X the average daily and being driven by an April 42 – July 46 put spread, in which an investor apparently bought 7,000 April 42 puts at 46 cents and sold 4,000 July 46 puts at $1.90. This looks like a roll, or closing April to open July. This investor might be selling the July $46 puts, which are more than 20 percent out-of-the-money, and willing to get assigned (buy shares at $46) if BHI falls to $46 or less by the July expiration.

Bearish
Xilinx (XLNX), the semiconductor equipment maker, touched a new 52-week high and is up 47 cents to $29.45. Meanwhile, today's options volume in XLNX includes 6,360 puts and 1,220 calls. The top trade is a block of 3,295 Jun 23 puts at 56 cents when the bid-ask spread was 53 to 56 cents. 4,230 traded. Another 1,268 January 29 puts changed hands. Some investors might be buying puts, hedging their bets ahead of earnings later this month (before the January expiration).

US Natural Gas Fund (UNG) is trading up after natural gas prices (February) jumped 20 cents to $4.61. UNG, which tracks the commodity with futures, adds 31 cents to $6.30. The top options trades are in the February puts and included a February 6 – 5 put spread, apparently bought at 25 cents, 5500X. More than 30,000 traded and will likely create new open interest in both contracts. These spreads pay-off if shares fall to less than $5.75 through the February expiration.

Unusual Volume Movers
Alcoa (AA) options volume is running 2X the usual, with 106,000 contracts traded and call volume accounting for 70 percent of the activity, according to data from website WhatsTrading.com.

GM options activity is running 2.5X the usual, with 86,000 contracts traded and call volume representing 84 percent of the volume.

Nvidia (NVDA) options volume is 3X the typical levels, with 81,000 contracts traded and call volume accounting for 91 percent of the activity.

Increasing volume is also being seen in Weatheford (WFT), Verizon (VZ), and Clorox (CLX).

Implied Volatility Movers
The top options trades through midday Monday are in the CBOE Volatility Index (.VIX). VIX is down .45 to 17.30 and one investor apparently sells 40,000 January 35 calls at 11 cents to buy 20,000 January 27.5 calls at 29 cents. They also sold 20,000 February 27.5 calls at 86 cents to buy 40,000 February 35 calls at 44.5 cents. This looks like a roll of a call ratio backspread out from January to February. If so, the strategist is selling the lower strike and buying twice as many higher strikes, which might be a bet that volatility will make a big spike before the February expiration or it might be to hedge a short position in VIX futures.