Cusick’s Corner 02-13-2012
This is a time when we want to keep an eye on Bonds, IEF/TLT, this may be a potential “tell” on the next move in the market. In other words, if the equities are going to continue to the upside that’s now at July highs, then yields on the long end of the bonds, 10 yr at 1.99%, need to break to the upside. If there is a break to the upside on the yields and the correlation of yields and equities continues, then equities will have some fuel — the cash coming out of from bonds — and we could see a potential break out in stocks which could be a signal for new upside levels. This is one way that you can look for potential market moves without relying on the next headline. See you Midday.

Stock market averages were up along with European benchmarks early Monday, but then moved in a narrow range on light volume throughout the remainder of the trading session. The underlying tone of trading was positive early after Greece approved a round of budget cuts over the weekend. In order to receive a second bailout and avoid a March debt default, Greece is trying to convince other EU members that the deeply indebted country is implementing a round of unpopular austerity measures despite riots in Athens. European benchmarks ticked higher on hopes for a deal and were led by a .9 percent advance in UK’s FTSE. On the domestic news front, President Obama sent a $3.8 billion budget to Congress. The plan is expected to add another $6.7 trillion to the debt over the next decade despite cuts to government spending and programs. The market didn’t seem to react much to the news and, with no economic data on the docket until Retail Sales numbers tomorrow morning, the Dow Jones Industrial Average had forged a 70-point gain through midday. From there, trading was largely uneventful and the Dow finished the day up 73 points. The tech-heavy NASDAQ gained 27.5 points.

Bullish
Southwest Energy (NYSE:SWN) sees heavy call volume Monday. Shares of the Houston, TX oil and natural gas company added just a penny to $33.60 on lighter-than-normal volume of 4.25 million. The recent daily average is 7.8 million shares. However, options volume jumped to 4.5X the daily average. 101,000 calls and 14,000 puts traded in Southwest Energy. The top trade of the day surfaced in morning action when one investor bought 11,250 March 34 calls on the stock for $2.19. The same investor sold 2,500 February 34 calls at 68 cents and sold 7,500 March 31 calls at $3.95. The same three-way spread traded multiple times today and volume in March 34 calls surged to more than 49,000 contracts. The activity appears to be rolling, or closing out positions in February 34 calls and March 31 calls to open new positions in March 34 calls. While the February 34 calls are 40 cents out-of-the-money and expiring at the end of the week, March 31 calls are $2.60 in-the-money. Monday’s bullish investor is possibly exiting positions in those two contracts and opening new positions in OTM March 34s. The position adjustment comes after an 8-day 10.5 percent winning streak in SWN shares.

Bullish trading was also seen in Diana Shipping (NYSE:DSX), Frontier Communications (NYSE:FTR), and Cheniere Energy (LNG).

Bearish
Put volume is picking up in NetApp (NASDAQ:NTAP) ahead of the company’s February 15 earnings release. Shares of the storage device maker were down 70 cents to $38.98 on an analyst downgrade Monday and options volume was 3X the daily average. 28,000 calls and 56,000 puts traded on NetApp today. The top trade of the day was a spread, in which the investor apparently bought 7,250 February 39 puts on the stock for $2.21 and sold 7,250 February 34 puts at 36 cents. The spread, for a $1.85 net debit, might have been initiated to hedge the risk of post-earnings volatility in the stock. NTAP tends to see volatility around earnings releases. Shares fell 12.3 percent on 11/17 after earnings were last reported. Shares suffered a 14.1 percent loss on 8/18 when profits missed Street estimates.

Bearish trading was also seen in Marathon Petroleum (MPC), Diamond Foods (NASDAQ:DMND), and Lincare Holdings (NASDAQ:LNCR).

Index Trading
The European Style S&P 100 Index (.XEO) saw more volume than usual. The index is listed under the ticker symbol XEO, which is OEX backwards. It is identical to the S&P 100 Index (.OEX), but with one important difference. OEX is one of the few cash indexes that has American style options contracts, which means that puts and calls on the index can be exercised at any time prior to the expiration. Like most (not all) other indexes, XEO settles European style, which means that exercise and assignment of options on the index can only happen at the expiration. Both OEX and XEO added 4.42 points to 611.54 Monday. Options volume in the XEO was 2.2X the daily average, with 4,680 puts and 2,670 calls traded in the product. OEX, which was the first market average to have options linked to its performance, tends to see more daily volume than XEO. 5,800 calls and 9,885 puts traded in the OEX pit today. Many old timers still like the OEX.

ETF Action
Monday was a very light volume day across the equity and options markets. 763 million shares traded in the SPDR 500 Trust (SPY), PowerShares QQQ (QQQ) and other ETFs, which is well below the recent daily average of more than 1 billion shares. In options, 1.65 million calls and 2.5 million puts traded across all exchange-traded funds, which is also well below (about 80 percent) the recent average daily levels. Some investors might be waiting on the sidelines ahead of key data later this week including Retail Sales Tuesday, FOMC minutes Wednesday and inflation data later in the week. The market’s low volatility and slow grind higher so far in 2012 might be beginning to take a toll on trading volumes as well. That is, investors tend to be more active in fast and volatile markets rather than quiet and slow markets.

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