Money Flows Out of Bonds into Equities 02-01-2011

Cusick's Corner
While the City of Chicago hunkers down for the snowstorm of the decade, the bond market is covering up like Rocky when he fought Apollo Creed in Rocky I. This is important for the market, the money that is moving out of bonds needs to work somewhere and US equities continue to be the investment of choice. Small Caps, RUT, are moving today and these higher beta stocks are the gas that this market needed to continue to press higher. Stocks to watch from this group are BRCD, VSEA, TWTC, all key components of the Small Cap ETF IWM that will be reporting earnings over the next couple of weeks. This could give us some insight into how these higher beta stocks could perform (acting like a canary in the coalmine). Time to trek home and baring any incident or power outage -- see you Midday. Frosty the Joe Man Out!

Stocks staged an impressive rally on Wall Street Tuesday. The table was set for early gains following a round of mostly earnings news from companies including Pfizer (PFE), Baidu.com (BIDU), and Archer Daniels Midland (ADM). The rally gathered additional momentum in morning trading after the ISM Manufacturing Index showed improvement to 60.8 in January, from 58.5 in December and significantly better from what economists had expected (58.4). The domestic news seemed sufficient enough to take the focus off of problems in Egypt and other parts of the Arab World. The Dow Jones Industrial Average added 148 points and closed above 12,000 for the first time since July 2008. The tech-heavy NASDAQ gained 51.

Bullish
Amphenol (APH), a Wallingford, CT electronics maker, touched a new 52-week high Tuesday and finished the day up $1.55 to $56.89. Options volume surged to 10X the recent average daily levels. 6,400 calls and 340 puts traded in Amphenol today. February 55 calls, which are now $1.89 in-the-money, were the most actives. 4,415 traded. February 60 calls saw heavy trading as well. It's not clear what was driving the trading, but it seemed bullish because most of the volume (about 80 percent) was trading at the asking price. Shares have performed well lately and got a boost last week when the company announced a stock repurchase program. Shares are now up $4, or 7.6 percent, since earnings were reported on January 19.

Bullish trading was also seen in Tibco Software (TIBX), American Eagle (AEO), and Hovnanian (HOV).

Bearish
Cavium Networks (CAVM) shares rallied $3.41 to $42.95 on earnings Tuesday and are now up almost 90 percent since late-August. Some investors might be looking to protect recent gains, as the March 40 – 45 put spread saw increasing interest today. The top trade was 1,000 at $2.10. In this spread, the investor apparently bought 1,000 March 45 puts at $2.80 and sold 1,000 March 40 puts at 70 cents. The spread, for a net debit of $2.10, offers a potential $2.90 pay-off (excluding commissions) if shares dip back below $40 through the March expiration. It traded 3000X on the session.

Bearish flow also surfaced in Riverbed Technologies (RVBD), Pulte Homes (PHM), and SM Energy (SM).

Index Trading
Trading in the index market included 711,000 calls and 619,000 puts, which is about 1.2X the recent average daily, according to Trade-Alert data. The CBOE Volatility Index (.VIX), which rallied nearly 4 points Friday, lost 1.90 to 17.63. The decline in the VIX comes as the S&P 500 rallied 21.5 points and closed at its best levels since the summer of 2008. Meanwhile, in VIX options action, 283,000 calls and 119,000 puts traded. While some investors were likely entering bullish trades on the weakness in the VIX today, others were likely opening new positions in anticipation of higher volatility in the weeks ahead.

ETF Action
After a two-day 7.4 percent run higher, the US Oil Fund (USO) lost 54 cents to $38.07 Tuesday. A noteworthy options trade was a bullish “risk-reversal” in morning action. The strategist sold a block of 5,000 January 35 puts at $2.85 and bought 5,000 January 45 calls at $2.15. They collected 70 cents on the combination. It traded more than 20,000X total and appears to be a bullish play on oil through 2012. USO is an exchange-traded fund that tracks crude oil through futures contracts. By selling $35 puts (to buy the $45 calls), the strategist is taking a bullish position calls and also saying that they are willing to buy (have put) USO shares at $35 through the January 2012 expiration.