Inflation is on the Brain 03-28-2011

Cusick's Corner
Inflation is on the brain and with the Hawks circling, this market needs leadership to arise before any real money is going to work. With that said, we may have this choppy action until the jobs data comes in at the end of this week. The Consumer Confidence Number will be a big one to watch tomorrow, potentially tipping the hand of employment and energy prices, i.e. oil. This could also validate what looks to be a new trend of increasing personal income. Strategically the market is in bull trend, so at-the-money bull call spreads could be the course of action in front of these potentially volatile data dumps this week. See you Midday.

Stock market averages fell during the final hour of trading and finished with modest losses Monday. Economic news was in focus early after data showed February personal spending up .7 percent, which was slightly better than the .5 percent that economists had expected. Incomes rose .3 percent, which was in-line with estimates. Meanwhile, Verizon (VZ) and AT&T (T) were the best gainers in the Dow Jones Industrial Average after an analyst upgraded the two along with a number of other telecomm stocks. However, a modest round of selling pressure surfaced late in the day and pushed the industrial average into the red. At the end of the day, there wasn't a whole lot happening to start the week on Wall Street. Dow was down 23 points and at session lows of 12,198. The tech-heavy NASDAQ lost 12.4 points.

Bullish
Harmony Gold (HMY) shares added 12 cents to $14.22 and options volume was heavy Monday, even as gold lost $6 to $1420.5 an ounce. 32,000 calls and fewer than 600 puts traded on the South African gold miner. The top trade of the day was a 10000-contract block of May 16 calls at 25 cents per contract on the ISE, which was an opening buyer, according to data from the exchange. May 15 calls, which are 78 cents out-of-the-money, were the most actives. 13,563 traded. August 15, August 17, and January 20 calls were seeing interest as well. There wasn't any company specific news in HMY to explain the action, but it seems to be bullish trading in anticipation of a rally in shares in the weeks/months ahead.

Bullish trading was also seen in Hartford Financial (HIG), LimeLight Networks (LLNW), and MEMC (WFR).

Bearish
Clincal Data (CLDA), which surged 124 percent from January 21 to February 15 on news the FDA had approved the company's anti-depressant drug, lost 6 cents to $30.29 Monday and given now up 11.5 percent since that time. The stock has been drifting lower since Forest Labs (FRX) said it was acquiring the company on February 22. Some investors might be bracing for bad news on the merger front, however, as CLDA saw a noticeable uptick in put activity today. 12,000 contracts, which is 5X the normal and compares to call volume of 2,365 contracts. April 30 puts, which are now at-the-money, were the most actives. 5,630 traded and 92 percent traded at the asking price, suggesting buyers were dominating the action. Open interest is 2,916 and this looks like opening activity. Risk arbitrage players hedging positions related to the deal might have initiated the bearish trades in CLDA today. Or, it might be straight bearish bets that the deal falls apart.

Bearish flow also surfaced in Goodyear Tire (GT), The Limited (LTD), and Emulex (ELX).

Index Trading
Trading was very quiet in the index options market Monday. 333,000 calls and 413,000 puts traded across the S&P 500 Index (.SPX) and other index products, which is about 52 percent the recent daily average, according to Trade Alert data. The CBOE Volatility Index (.VIX) added 1.53 to 19.44, as anxiety levels about the European Debt Crisis, the Japan nuclear problems, and unrest in Libya are adding to the market uncertainty. However, at 19.44, VIX is 37.9 percent below the multi-month high set on March 16, when concerns about the Japanese earthquake and nuke crisis sent the market's “fear gauge” rallying to 31.28.

ETF Action
Energy Select Sector Fund (XLE) touched a new 52-week high of $79.40 Monday morning, but finished down 19 cents to $78.50 after crude oil slipped $1.60 to $103.80 a barrel. Meanwhile, in XLE options action, midday trades included a September 77 – 70 put spread, apparently bought at $2.33, 8500X. That is, it appears that the investor bought 8,500 September 77 puts at $4.55 and sold 8,500 September 70 puts at $2.22. It's a bearish play, as it makes its best profits if shares fall to $70, or 11.8 percent, through the September expiration. Since XLE holds shares of all the energy-related names from the S&P 500, it's a play on the sector and not a straight bearish bet on crude oil prices.