Market Longs Are Strong 01-18-2011

Cusick's Corner
The market has held up again and is potentially setting up a nice upside challenge. This is the blow off that we have been waiting for and the catalyst could be AAPL's earnings. While the sustainability of a blow off run will come into question, the mere fact is that the longs are strong and any pullback will be met with a consolidation until the bid swoops in. This type of action has been confirmed in Tech and Finance with both sectors running off their lows. I will be watching resistance levels of 1300 on the SPX to see if momentum will continue or a consolidation pullback forms in this ever-maturing market.

The major averages finished with modest gains Tuesday. Economic data caught investors' attention early after the NY Empire State Index of regional manufacturing activity showed an improvement to 11.92 in January, up from 9.89 the month before and roughly in-line with economist estimates (of 12.0). A separate report released later showed the NAHB Homebuilder Sentiment unchanged at 16 in January, which was also as-expected. Meanwhile, the day's stock news was mixed. Citi (C) fell after earnings missed Street views. Apple (AAPL) traded lower ahead of earnings and on reports Steve Jobs is taking another medical leave of absence, but bounced after hours after another knock out Quarter. Boeing (BA) is up 3.4 percent and was best gainer in the Dow Jones Industrial Average after announcing that delivery of its first 787 Dreamliner is slated for the third quarter. BA helped lift the Dow Jones Industrial Average to a 51-point gain. The tech-heavy NASDAQ added 10.5.

Bullish
Copart Inc. (CPRT), a Fairfield, CA auto dealership, added $2.00 to $39.56 and closed near session highs after the company announced plans to buy back 12 million shares as part of a tender offer. CPRT rallied on the news and options action included 9,050 calls and 1,175 puts. January and February 40 calls were the most actives with 4,345 and 3,162 contracts traded respectively. In addition, 93 percent of the total call volume in Copart Tuesday traded at the ask, according to data from web site WhatsTrading.com, which indicates that call buyers were dominating the action and looking for a move beyond $40 in the days/weeks ahead.

Bullish trading was also seen in Caterpillar (CAT), Affymetrix (AFFX), and Goldcorp (GG).

Bearish
Put volume jumped in medical device maker Boston Scientific (BSX) Tuesday. Shares lost 20 cents to $7.33 and put volume rose to 52,000 contracts, which is 15X the typical volume and almost 10X the day's call activity. May 7 puts were the most actives and 27,550 contracts changed hands. The top trades included a spread, in which the investor apparently sold 15,000 January 7.5 calls at 15 cents and bought 15,000 May 7 puts at 50 cents. The action appears to be a roll, a sell-to-close of the January puts and a buy-to-open of the May 7 puts. A shareholder looking to hedge shares for another four months might have initiated the spread.

Bearish flow also surfaced in EBAY, Transocean (RIG), and Bucrus International (BUCY).

Index Trading
The CBOE Volatility Index (.VIX) recovered some of the 10 percent loss suffered the week before. VIX added .41 to 15.87 today and trading in VIX options was brisk, with 436,000 calls and 154,000 puts traded on the volatility index. A hefty amount of the activity was driven by the expiration. VIX options expire on Wednesdays and therefore the last day to trade the January 2011s was today. (Note, sometimes it's the Wednesday before the standard expiration. Sometimes it's the Wednesday after.) the most active VIX options were in later months. For example, VIX February 37.5 calls traded more than 61,000. Volume in the March 32.5 calls increased to 60,000. Some investors turn to these deep out-of-the-money VIX calls as a “cheap” way to hedge the risk of increasing volatility. Since the calls are so far out-of-the-money, the premiums are relatively low and these calls are cheap.

ETF Action
Oil Service HOLDRS (OIH) saw increasing options action today. Shares, which track the share price action of leading oil drilling companies, touched a new 52-week high Tuesday and finished the day up 95 cents to $147.54, even after crude oil lost 25 cents to $91.29. Meanwhile, options volume in OIH hit 3X the average daily. 21,000 calls and 32,000 puts traded on the ETF. The top trades were blocks (7500X2) of February 130 puts at 66 cents and possibly liquidating trades. 15,973 traded total, compared to 19,083 in open interest. Another noteworthy trade is an apparent roll, in which an investor sold 1,500 January 144 calls at $3.25 to buy February 155 – 160 call spreads at 90 cents, 3600X. The strategist was likely closing out a bullish position in the January calls and opening a new bullish spread in the February call spread. January 2011 options expire at the end of the week.