Cusick's Corner 04-18-2012

I wanted to take the pulse of the action in the major offensive sectors. Tech, QQQ/XLK, & Consumer Discretionary, XLY, have been the leaders in this current trend up and these are also the major sectors to watch. If these sectors get weak, the market could be potentially struggling. We also need Finance, XLF, & Industrials, XLI, to pick up action, these sectors have been flat and one of these two sectors needs to get some more octane to the upside and show more leadership. Lastly, Materials, XLB, and Energy, XLE, need to break current consolidation, XLB, and downtrend, XLE, then a bullish trend may become more prevalent in both if there is a nice break up. If Tech or Discretionary pullback in the short term, this could be healthy but potential red flags could also be raised if they break critical levels, XLK below $27 or XLY below $40. See you Midday and shore up your expiration risk into tomorrow and Friday.
Stock market averages fell in relatively uninspired market action Wednesday. Volatility across European equity markets set the stage for the morning slide after Spain's IBEX came under fire. The index lost nearly 4 percent and paced a decline across European equity markets on reports Spanish banks are seeing a sharp rise in bad loans. In the US, much of the focus is shifting to first quarter earnings. IBM lost 3.5 percent and was the biggest loser in the Dow Jones Industrial Average on the heels of its latest report. Intel (INTC), CREE, and Linear Technology (LLTC) also suffered post-earnings losses. However, Yahoo (YHOO), Seagate Technology (STX) and Halliburton (HAL) were among the names seeing post-earnings gains. Attention now turns to profit reports from EBAY, Qualcomm (QCOM), and American Express (AXP) after the closing bell. Bank of America (BAC), Morgan Stanley (MS), and Verizon (VZ) are among a boatload of companies due to report tomorrow morning. Trading is cautious ahead of the earnings deluge. The Dow Jones Industrial Average lost 83 points on the session and the NASDAQ gave up 11.4 points.

Intel (INTC) was the subject of heavy trading Wednesday. Shares of the world's largest chipmaker lost 52 cents to $27.95 on heavy turnover of 72 million shares after the company reported better-than-expected first quarter profits, but some analysts expressed concerns about the company's second quarter guidance. Options volume on Intel surged to 6X the daily average. 460,000 calls and 200,000 puts traded in the name. One noteworthy trade was a seller of 60,000 July 23 puts on INTC at 23 cents per contract. The Jul 23 put is now 17.7 percent out-of-the-money and the investor might have sold the massive block on expectations Intel will hold above $23 now that the earnings risk has passed. Meanwhile, July 30 and 31 calls were the most actives in Intel today. Some investors might have been buying the July 30 - 31 call spread on hopes the stock may continue to rally through mid-July. Although INTC was down on earnings today, it is already up 19 percent so far in 2012.
Bullish trading was also seen in Yahoo (YHOO), Hertz (HTZ), and El Paso (EP).

United Airlines (UAL) edged up 3 cents to $22.70 on relatively light volume of 6.3 million shares. Meanwhile, 16,000 puts and 7,000 calls traded on the airliner today, which is 2.5X the daily average for the name. The top trades of the day were part of a spread, in which the investor apparently bought 4,000 May 20 puts on UAL for 38 cents and sold 4,000 May 18 puts at 15 cents. The May 18 - 20 put spread, for 23 cents, looks like a new position and possibly designed to help hedge a stock position. The spread will offer its best payoff if shares fall to $18 through the May expiration, which represents a 20.7 percent slide over the next 30 days. Earnings are expected later this month.
Bearish trading was also seen in DISH Network (DISH), Nuance (NUAN), and Sprint (S).
Index Trading

Trading was active in the index market Wednesday and heading into the April expiration. 863,000 puts and 623,000 calls traded on the S&P 500 Index (.SPX), the S&P 100 Index (.OEX), and other cash indexes. The S&P 500 lost 5.64 points to 1,385.14 and CBOE Volatility Index (.VIX), which tracks the implied volatility index of SPX options, ticked .18 higher to 18.64. VIX May 25 and 30 calls were the most active index contracts on the day, as some investors might have been buying upside calls on the index to hedge the risk of increasing volatility over the next few weeks. April options on the index expired today and the settlement value was 19.06. The last day to trade most other April index options is tomorrow and settlement values are computed Friday morning.
ETF Action

iPath S&P 500 Short Term VIX Futures Fund (VXX) edged 26 cents higher to $18.25 and 72,000 calls and 160,000 puts traded in the product. The top trade of the day in VXX options was a spread, in which the investor apparently bought 15,000 May 15 puts on the fund for 35 cents and sold 15,000 May 14 puts at 15 cents. If opening, this May 14 - 15 put spread, for a 20-cent debit, is a bearish view on volatility. It offers its best payout if VXX falls to $14 or more through the May expiration, which represents a 23.3 percent slide over the next 30 days. VXX has been grinding higher off late-March lows of $15.57 per share, but is still well below the levels seen in October, when shares fetched more than $59.
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