Notable Weakness in Small Caps 02-07-2011

Cusick's Corner
This market continued to hold up into the close with most of the major averages closing near the highs. However, there was some notable weakness in the Small Caps, IWM, which is a development to keep an eye on. I have referred to these high beta Small Caps as the proverbial canary in the coalmine, if they become weak could be a signal that potential pressure is emerging on an already extended market. This is not a signal of a complete reversal; we would need settlements below the Jan lows for me to be concerned about a deeper pullback. The EU is also flush with headlines out of Greece and Germany, a court ruling on IR swaps due out, potentially creating some implications for the Finance segment. See you Midday.

Stock market averages finished with gains following a round of merger news Monday. Some of the media names saw increasing interest after AOL made a bid for web news site Huffington Post. Oil driller Pride International (PDE) rallied after Ensco (ESV) made a bid for the company. Meanwhile, Danaher (DHR) said it was buying medical equipment maker Beckman Coulter (BEC). The day's earnings news included better than expected results from Loewe's (L) and Lorillard (LO), and an earnings miss from Humana (HUM). The only economic data of the day showed Consumer Credit up $6.09 billion in December. Economists were expecting $2.5 billion. The data didn't move the market much. Instead, the Dow Jones Industrial Average opened higher on the merger news and spent the remainder of the session chopping sideways. At the closing bell, the Dow was up 70 points and the tech-heavy NASDAQ had added 14.7.

Bullish
There was interesting action in homebuilder Pulte Homes (PHM) today. Shares finished the session up 7 cents to $7.61. Options volume was 9,050 calls and 1,005 puts. The action included several lots of January 7.5 calls traded at the $1.45, $1.46 and $1.47 asking price. It looks like one or more investors were accumulating positions during Monday's session and, at the end of the day, 5,508 contracts traded. March and July 8 calls saw interest. The January 2013 $15 calls even saw some interest. The homebuilder reported earnings Friday and, although the stock didn't really react and finished the day flat Friday, it appears that some investors now expect the stock to move higher in the months and years ahead.
Bullish trading was also seen in Vulcan Materials (VMC), Gannett (GCI), and Calpine (CPN).

Bearish
Texas Instruments (TXN) sees a second day of increasing put volume. February 35 puts, March 34 puts and February 32 puts were active late Friday. Shares touched a new 52-week high Monday, but then gave up early gains to finish down 18 cents to $35.26. Meanwhile, 21,000 puts and 4,680 calls traded on the chipmaker. February 34 and 35 puts were the most actives. April 34 puts and calls were busy as well. It's not clear what is driving the heightened volume in TXN options. The company reported earnings on January 25 and the stock has been grinding steadily to new highs ever since.
Bearish flow also surfaced in Seagate Technology (STX), Dean Foods (DF), and Mako Surgical (MAKO).

Index Trading
Trading volume picked up in the index market Monday, after several days of relatively slow trading the week before. 537,000 calls and 638,000 puts traded across the S&P 500 Index (.SPX) and other cash indexes, which is about the normal average daily volume, according to Trade Alert data. The CBOE Volatility Index (.VIX) edged up .37 to 16.30, even as the S&P 500 Index (.SPX) added 8.2 points to 1,319.05. VIX normally moves lower when the S&P 500 tacks on a few points. Yet, the volatility index fell 20.5 percent last week. So, today's uptick in the VIX might be a bit technical in nature. Meanwhile, the top options trade in the VIX was interesting, after a block of 36,000 Feb 22.5 calls traded at 17 cents, which might be a buyer bracing for a short-term pop in market volatility.

ETF Action
An interesting spread traded in the iShares Small Cap Fund (IWM) this afternoon. Shares touched a new 52-week high Monday morning and finished the day up 79 cents to $80.66. In options action, one investor sold 40,000 March 75 puts at 76 cents, bought 20,000 March 78 puts at $1.35 and bought 20,000 March 72 puts at 43 cents. The position is a 1X2X1 March 78 – 75 – 72 put butterfly spread for a net debit of 26 cents. It's a bearish play, or maybe a hedge, as the spread offers its max pay-off if shares of the small cap fund fall to $75 through the March expiration, which is 7 percent over the next 39 days.