Narrow Trading Range 02-15-2011

Cusick's Corner
The activity was tight today, as a matter of fact from a trading perspective it was a nothing day. The weakness in Crude continued. The Small Caps also showed some weakness on the close, while the market in general held critical levels of 1324 on the SPX. One market that I have not discussed in a while (but has been on my radar) is Gold, which looks to have garnered enough of a base where bids are starting to gain some momentum. GLD finished the day above mid-term support, 50-Day Moving Average 133.83, which is encouraging since it has not been at that level in over a month. I would like to see some follow through in the next few sessions. Housing and PPI will be front and center tomorrow. In Housing, the market will be watching to see if the starts in multifamily continue to rise and if the number of permits continue to jump, which could signal improving employment and income conditions. With the PPI, the market will be monitoring if consumers are feeling the commodity inflation that has come upon the market, putting potential constraints on economic and income growth. See you Midday.

Stock market averages finished with losses following a round of uninspiring economic news Tuesday. Data released before the opening bell showed retail sales increasing .3 percent in January. It was the seventh consecutive increase in monthly retail sales, but the headline number fell short of economist estimates of .5 percent. Separate data showed the NY Empire State Index increasing to 15.43 in February, which was up from 11.92 last month and a bit shy of expectations (15.5). A third report showed business inventories up .8 percent in December, which was .2 percent more than expected. Stock market averages fell on the economic data and never recovered. The day's stock news didn't hold much new information. Exxon Mobile (XOM) was the biggest loser in the Dow Jones Industrial Average after crude oil fell to 11-week lows. XOM gave up 2.8 percent. Twenty other Dow stocks finished with losses, eight moved higher, and the industrial average lost 41 points. The tech-heavy NASDAQ lost 12.8 points ahead of Dell's earnings, which are being released this afternoon.

Bullish
While 21 Dow stocks fell, 8 moved higher, Pfizer (PFE) was the only Dow component to finish flat. Shares closed unchanged at $19.05. Meanwhile, in options action, 56,000 calls and 13,000 puts traded in Pfizer. The top trades were part of a spread. In this strategy, the investor apparently bought 10,000 September 20 calls at 70 cents and sold 10,000 March 19 calls at 39 cents each. This diagonal spread, at a net debit of 31 cents, might be a bet that shares will hold around current levels through the March expiration, but then rally through the September expiration. Or, it might be rolling of a bullish position out from March to September and up 1 strike price.

Bullish trading was also seen in Gap Stores (GPS), Akamai (AKAM), and Newell Rubbermaid (NWL).

Bearish
Dean Foods (DF) puts were actively traded today. The grocery chain is due to release results tomorrow morning and shares are down in five consecutive trading sessions leading up to the news. DF lost 6 cents to $9.79 today. In the options market, February 9 puts were the most actives. Two blocks of 6,500 (13,000 total) traded at 30 and 35 cents. The market was 25 to 35 cents at the time. So, it appears that a buyer initiated the trade. 19,438 contracts traded on the session, as some investors seem to be opening new put positions on concerns about additional losses in DF ahead of the earnings results.

Bearish flow also surfaced in Career Education (CECO), Freeport McMoran (FCX), and Silicon Labs (SLAB).

Index Trading
CBOE Volatility Index (.VIX) ticked higher after the S&P 500 Index (.SPX) lost 3.2 points to 1,328. VIX, which tracks the expected volatility priced into SPX options, often moves higher when the S&P 500 loses ground. The Volatility Index added .47 to 16.28 today and trading in VIX options was brisk due to the expiration. Unlike other stock and index products, VIX options expire on Wednesdays. In this case, the expiration is tomorrow (sometimes it is after the standard expiration) and the last day to trade the VIX February contract was today. 362,000 calls and 112,000 puts traded on the volatility index. While a lot of the action was probably closing of February options, the most actives were March and April 27.5 calls, which might be bullish trading in anticipation of a jump in volatility in the weeks/months ahead.

ETF Action
An interesting trade surfaced in the Financial Select Sector Fund (XLF) Tuesday morning. Shares of the exchange-traded fund touched a new 52-week high early, but finished down 2 cents to $17.07. Meanwhile, in options action, one investor bought 100,000 May 15 puts at 19 cents and also bought 100,000 May 19 calls at 19 cents. This May 15 – 19 strangle, for a net debit of 32 cents, appears to be an opening position and a bet that the financial sector will see increasing levels of volatility in the months ahead. XLF holds all of the financial-related companies from the S&P 500.