Grind Continues 04-05-2011

Cusick's Corner
The grind continued into the close. Overnight markets will be watched closely, especially in China and then early morning the EU. In China there is growing speculation that the tightening has slowed growth and now there is potential evidence in inventory builds, most notably copper. This is a story that will be watched closely into the new earnings season and while the VIX is low, could be a catalyst to break out of this grind. See you Midday.

Stocks finished mixed in quiet trading Tuesday. Chip stocks were in focus early after Texas Instruments (TXN) made a bid for National Semiconductor (NSM) late-Monday. Meanwhile, some of the metals names saw interest after gold prices rose to record highs (see Bullish Flow). Silver also rallied Tuesday. On the economic front, the Institute of Supply Management [ISM] said that its Services Index, which tracks economic activity outside of manufacturing, fell to 57.3 in March, from 59.7 the month and worse than the 59.5 that economists had expected. Stock market averages slipped on the data, but had moved back to positive territory into midday and ahead of the minutes from the Federal Reserve's March meeting. The minutes showed that some Fed officials are becoming increasingly concerned about inflationary pressures, but the text signaled no imminent shifts in the low interest rate policy. Consequently, the market's reaction was muted and at the closing bell, the Dow Jones Industrial Average was down just 6 points. The tech-heavy NASDAQ added 2 points.

Bullish
Goldcorp (GG) saw heavy trading amid rallying crude oil prices and ahead of the gold miner's Investor Day, which is Wednesday. Gold reached record levels Tuesday and was recently trading up $24.60 to $1,457.60 an ounce. Meanwhile, Goldcorp, a Vancouver, BC-based gold miner, notched a new 52-week high and added $2.96 to $52.16 on the session. Options volume jumped to 3.5X the average daily after 56,000 calls/16,000 puts traded in GG. April 52.5 calls, which are now 34 cents out-of-the-money and expire at the end of next week, were the most actives. Volume approached 30,000 contracts. April 49 and 50 calls were very busy as well.

Bullish trading was also seen in Endeavour Silver (EXK), Tyco International (TYC), and Dean Foods (DF).

Bearish
Put volume picked up in Aruba Networks (ARUN) Tuesday. Shares of the Sunnyvale, CA communication and networking company lost $1.85 to $31.75 and options volume rose to 5X the recent average daily levels. 29,000 puts and 6,350 calls traded in the name today. The top trades were part of a spread, in which the investor apparently bought 5,000 May 31 puts at $2.40 and sold 5,000 May 26 puts at 70 cents. This spread traded for a net debit of $1.70 and looks like a bearish play that makes its best profits if shares fall to $26 or less by the May options expiration which is in 45 days.

Bearish flow also surfaced in Regal Entertainment (RGC), Anadarko Petroleum (APC), and Duoyuan Global Water (DGW).

Index Trading
The index market continues to see very quiet trading as the economic calendar is light this week and focus is beginning to shift to quarterly earnings. First quarter earnings-reporting season kicks off Monday with a report from Dow component Alcoa (AA). 445,000 calls and 480,000 puts traded across the S&P 500 Index (.SPX), CBOE Volatility Index (.VIX) and other cash indexes today, which is only 70 percent the average daily, according to Trade Alert. CBOE Volatility Index lost another .25 to 17.25 and has now suffered a 41.3 percent drop in less than three weeks. Low index volume and a falling VIX indicate that portfolio managers are not actively buying portfolio protection, which stands in stark contrast to the situation three weeks ago when fears about rallying crude oil prices and the Japanese nuke crisis sent volume in the index market and the VIX soaring in mid-March.

ETF Action
The iShares Emerging Markets Fund (EEM), which holds shares of companies from developing countries like China, Russia and Brazil, touched a new 52-week high today, but gave up the gains and lost a dime to $49.66. Meanwhile, options volume was heavy, with 566,000 calls and 110,000 puts traded in the ETF. A large four-way spread traded in morning action. One investor sold the April 50 - 52 call spread at 46 cents, 100,000X and also bought the May 51 - 53 call spread at 58 cents, 100,000X. These massive spreads are probably part of a roll. That is, the investor is selling to close 100,000 April 50 - 52 call spreads ahead of next week's expiration and opening a new similar bullish position in the 51- 53 call spread that expires in May.