FOMC Minutes Optimistic 02-16-2011

Cusick's Corner
The S&P 500 has now doubled its value from two years ago and the tone of the overall market remains upbeat. Corporate earnings are staying positive. The FOMC Minutes that were released today sounded more optimistic about the nation's recovery; however they were not satisfied with job growth. On the economic calendar for tomorrow -- economists project that the CPI probably increased 0.3% for January mostly due to increases in energy and food costs, but we will know the exact number when it comes out before the market opens. See you Thursday.

Stocks finished broadly higher after earnings and mergers overshadowed mixed economic news. Data released Wednesday morning showed Housing Starts improving by 14.6 percent to an annual rate of 596,000 in January. Economists were looking for only 540,000. The latest Producer Price Index showed an uptick to .8 percent in January, and .1 percent hotter than expected. A third piece of economic news showed Industrial Production falling .1 percent last month. Economists were expecting an increase of .6 percent. Yet, investors seemed to shrug off the hot PPI and the weak industrial production, and focus on the day's stock news. DELL rallied 11.9 percent after the computer maker reported stronger-than-expected earnings late yesterday. Merger news was also in focus after Sanofi (SNY) and Genyme (GENZ) finalized a long-awaited deal. Family Dollar (FDO) rallied 21.1 percent after Nelson Peltz's investment firm made a bid for the retailer. Meanwhile, within the Dow, JP Morgan (JPM) was the best gainer, adding 2.9 percent, the day after the bank hosted an Analyst Day. Twenty-two other Dow stocks moved higher, seven traded lower, and the industrial average gained 61 points. The NASDAQ added 21.

Bullish
Chico's FAS (CHS) has seen bullish options order flow this week. The action started yesterday amid increasing interest in March and May 13 call options. Shares of the retailer added 31 cents to $12.35 and the action continued today. 6,320 calls and 140 puts traded in the name, or 4X the average daily levels. March 14 calls, which are $1.65 out-of-the-money, were the most actives. 2,564 traded. March 13 and February 12.5 calls saw interest as well. In addition, of the day's total call volume, 83 percent traded at the Ask, according to data from web site Whatstrading.com. The heavy trading at the offer is a sign of buying interest. The two days of bullish trading comes amid unsubstantiated speculation that a private equity firm is eyeing Chico's, which might have gained some credibility today after Family Dollar Stores was the subject of a bid.

Bullish trading was also seen in Level 3 (LVLT), Micron Technology (MU), and Sirius Satellite (SIRI).

Bearish
China Agritech (CAGC) is back under pressure. Shares of the Chinese chemical company have been under pressure in recent weeks following negative newsletter and brokerage commentary. The selling gathered momentum today, as shares sank to a new 52-week low and lost $1.77 to $7.44 on the session. CAGC is now down 43.6 percent since January 6. Meanwhile, options volume Wednesday included 15,000 puts and 5,760 call options. February 7.5 puts were the most actives. Feb 6 puts, Feb 7.5 calls and Feb 10 puts saw some interest as well. Meanwhile, implied volatility surged 65 percent to 150, as some players in the options market seem to be bracing for additional fallout for CAGC before the expiration on Saturday.

Bearish flow also surfaced in Wells Fargo (WFC), Ciena (CIEN), and SM Energy Corp (SM).

Index Trading
The CBOE Volatility Index (.VIX) ticked higher even after the S&P 500 Index (.SPX) added 8.21 points to 1,336.32. VIX, which tracks the expected volatility priced into SPX options, normal moves lower when the S&P 500 gains ground. Yet, today, the volatility index added .35 to 16.72 and might be “pricing in” the possibility for increasing volatility around the options expiration. The last day to trade stock and ETF February options is Friday. February options on many index products stop trading tomorrow. Volume is already picking up. 729,000 calls and 1 million puts traded across SPX, VIX and other cash-settled indexes today, which is 1.5X the recent average daily volume.

ETF Action
A correction to yesterday's note on the Financial Select Sector Fund (XLF) strangle color. We noted that 100,000 May 15 puts traded at 19 cents and 100,000 May 19 calls at 19 cents to create a May 15 – 19 strangle at 32 cents. Oooops. The May 19 calls actually traded at 13 cents. Thanks to the observant reader that pointed out the error. In today's trading, the iShares Xinhua China Fund (FXI) saw more action that usual. Shares added 51 cents to $42.31 and options volume rose to 4X the average daily. 246,000 calls and 62,000 puts traded in the ETF. January 60 calls were the most actives. 51,340 contracts changed hands, including a buyer of 50,000 contracts at 26 cents each. They must be looking for a dramatic rally in China's equity markets. The contract is 41.8 percent out-of-the-money.