Small Caps More Sensitive to Domestic Economic Conditions 01-19-2011

Cusick's Corner
The Small Caps, higher Beta stocks (IWM), were the real movers to the downside today. This raises a potential red flag because these markets are more sensitive to domestic economic conditions. If the economy at home does look like it is potentially slowing, then these stocks in the Small Cap index will be affected. As previously noted, these markets have been oversold for awhile, so a pullback and consolidation (or break if you want to call it), makes sense but we want to watch critical levels in key sectors -- IWM $74, QQQQ $54, and XRT $44. If the market does work through key levels on the upside, SPX 1287, then the negative nature of this pullback could be negated. Claims data is out tomorrow in the pre-market, home sales come out after the open, plus options expiration is upon us. Volatility could be on the move. See you Midday.

A modest 13-point loss in the Dow Jones Industrial Average masked a bearish trading day on Wall Street Wednesday. While the Dow suffered a very small loss, the S&P 500 Index was sacked for a 13-point drop and the NASDAQ tumbled 40.5 points. IBM gained 3.4 percent on better-than-expected earnings and helped to keep the Dow steady. However, IBM was only one of eight Dow stocks moving higher today. Twenty-two traded lower. Meanwhile, CREE, which lost 14.4 percent on earnings, weighed on the NASDAQ. Apple (AAPL) traded higher Wednesday morning after its profit report blew past estimates, but gave up early gains and finished down on the session as well. Post-earnings drops in Goldman Sachs (GS) and Wells Fargo (WFC) weighed on the financials. On the economic front, data released before the bell showed Housing Starts at an annual rate of 529,000 homes in December, which was down from 553,000 the month before. Finally, the upcoming options expiration might be exacerbating volatility as well. The CBOE Volatility Index (.VIX) gained 1.46 to 17.33.

Bullish
Huntsman (HUN) calls were busy today. Shares of the chemical maker lost $1.08 to $16.72 and the focus was on the February 16 call options, which traded more than 10000X. The action includes two blocks of 5,000 that traded at $1.40 and $1.80 per contract. The calls were being sold against Huntsman shares as part of a covered call or buy-write strategy, according to a source on the exchange floor. That is, the investor was buying stock and selling in-the-money calls. If shares hold above $16 through the February expiration, the strategist will be assigned on those calls and asked to sell the stock at $16. If 1 call sold for every 100 shares, the profit, excluding commissions, is equal to the difference between the new cost basis of the stock (stock price minus premium for calls) and the strike price of the option.

Bullish trading was also seen in IBM, Cubist Pharmaceuticals (CBST) and Tibco Software (TIBX).

Bearish
Bearish trades surfaced in Murphy Oil (MUR), the El Dorado, AR oil and gas refiner. Shares finished the day down $1.25 to $73.06 and the action was concentrated in the February 65 calls. 5,230 traded on the day. The top trade was a block of 3,300 at the 55-cent asking price. Beyond that, most of the action was in smaller sizes and traded predominantly (97 percent) at the asking price. February 70 puts traded another 420 contracts. No news on the stock. The action might be a play on earnings, due January 26.

Bearish flow also surfaced in Blue Coat Systems (BCSI), Legg Mason (LM), and Kroger (KR).

Index Trading
Options action is heating up in the index market heading into the options expiration. Since the S&P 500 Index (.SPX) and many other cash indexes settle using Friday morning prices, the last day to trade the contracts is on the Thursday before expiration. So, volume often picks up midweek. Today, for example, 1.27 million puts and 933 calls traded across the S&P 500 and other cash indexes, which is more than double the recent average daily volume, according to Trade Alert data. VIX 32.5 calls were the most actives. SPX Jan 1250 puts were the second. While SPX lost 13.10 to 1,281.92, VIX jumped 1.44 to 17.31.

ETF Action
A noteworthy spread trades in the Technology Select Sector Fund (XLK). The fund, which holds shares of all the information technology names from the S&P 500, finished the day down 19 cents to $26.01. In morning trading, one investor initiated a 1X2 call ratio spread, selling 25,000 January 26 call options at 28 cents and buying twice as many (50,000) January 27 calls at 14 cents each. This 1X2, at even money, is likely a roll of in-the-money January calls to out-of-the-money February calls. January options will expire at the end of the week and now have just two trading days of life remaining. The strategist is probably looking for the tech sector to perform well through the next expiration (30 days).