Bulls Lost that Loving Feeling 03-07-2011

Cusick's Corner
The sellers have the upper hand this Midday in spite of the pullback in oil. As I noted on Friday, the longs may done some hedging in the futures on the close and insurance looked like a good idea. The market gave us another window of opportunity earlier this morning to potentially implement that insurance and it is still a viable strategy to review going into what looks to be some potentially volatile trading. The 1300 level on the S&P 500 is the critical support level that I will be keeping an eye on. If the selling does ramp up into the into the After Hours, watch the 50-Day Simple Moving Averages, 1294 on the March S&P futures which is mid-term support. It is almost like the Bulls are singing a little “September Morn” (Neil Diamond classic) now that the Bears are in the market. Let's see if the Bulls still feel so positive at the end of this dance or if they start losing that loving feeling. See you After Hours.

Stocks are broadly lower amid ongoing worries about the global economic impact of rapidly rising oil prices. April WTI crude hit a high of $106.95 and was recently up 69 cents to $105.11 a barrel after forces loyal to Libyan leader Muammar Gadhafi battled with rebels near an important oil port in Libya. Although crude has backed off session highs, the recent spike in oil is raising concerns about the economic effect of higher energy prices and the impact to corporate earnings. Gasoline topped $3.50 per gallon. With no earnings of importance and no economic data scheduled until Consumer Credit numbers this afternoon, there hasn't been much other news to guide the market. As a result, the underlying tone of trading remains cautious. The Dow Jones Industrial Average is down 78 points at midday. The tech-heavy NASDAQ lost 48.5 The CBOE Volatility Index (.VIX) is up 1.99 to 21.05. Overall options volume is respectable, with 5.1 million calls and 4.2 million puts traded through 12:30pm ET.

Bullish Flow
Western Digital (WDC) shares are up $3.50 and options are very busy today after the storage device maker announced plans to buy Hitachi Storage Group for $4.3 billion in cash. Investors seemed to like the news. WDC rallied at the open and options volume includes 21,000 calls and 12,000 puts. March 36 calls, which are 7.6 percent out-of-the-money with less than two weeks of life remaining, are the most actives. March 35 and April 35 calls are busy as well.
Target (TGT) shares lost 38 cents to $51.27 and a noteworthy trade in the retailer today is a July 49 – 55 bullish risk-reversal at 37 cents, 4000X. In this combination, it appears that the strategist bought 4,000 July 55 calls at $1.44 and sold 4,000 July 49 puts at $1.81. Another noteworthy trade is a block of 4,785 August 50 puts, which traded at 80 cents when the market was 83 to 85 cents. Looks like a put seller. There's no news on Target today, but the action today seems to suggest that some investors expect the stock to at least hold steady in the months ahead. Shares are up 2 percent since earnings were reported on February 24.

Bearish Flow
SPDR 500 Trust (SPY) is down $1.63 top $130.84 and SPY March 116 put is today's most actively traded options contract. Total volume is more than 100,000 contracts and includes a buyer 89,000 contracts at 8 cents apiece. Open interest is more than 155,000 and this might be a closing trade. Or, an institution might have initiated the trade for a short-term portfolio hedge. The contract is 11.3 percent out-of-the-money with a delta of -.03. March options expire in 11 days.

Vishay Intertechnology (VSH) is trading down 94 cents to $17.97 on a rough day for the tech sector. Meanwhile, options volume is running 5X the 22-day average daily volume for VSH. 5,990 puts and 333 calls traded in the name so far. July 17.5 puts are the most actives. 5,245 traded and 87 percent traded at the ask, suggesting put buyers are dominating the action. July and October 15 puts are seeing interest as well. The stock hit a new 52-week high of $18.99 last week and some shareholders might be buying puts to hedge stock.

Semiconductor HOLDRS (SMH) options volume is running 4X the (22-day) average, with 51,000 contracts traded and put volume accounting for 90 percent of the volume.
AMR options volume is 3X the average daily, with 49,000 contracts traded and call volume representing for 83 percent of the activity.
Western Digital (WDC) options volume is running 4X the average daily, with 32,000 contracts traded and call volume accounting for 64 percent of the activity.
Increasing options activity is also being seen in Lorillard (LO), Human Genome Sciences (HGSI), and Liberty Global (LBTYA).

Implied Volatility Mover
Human Genome Sciences (HGSI) implied volatility is elevated ahead of a March 10 PDUFA date for the company's Benlysta Lupus drug. Shares are up 3 cents to $25.61 and today's options volume of 31,000 puts/10,000 calls is 3.5X the average daily volume. Implied volatility is up 3 percent to 80, as players in the options market are bracing for the Food and Drug Administration [FDA] final decision on Benlysta.