Sector Rotation 09-29-2011

Cusick's Corner
The market is holding up well into the Midday, and Financials, XLF +2.35%, are leading the way which highlights that there's some sector rotation out of Tech into Financials. Energy, XLE +1.26%, and Industrials, XLI +1.61%, are all outperforming the S&Ps, SPY +.99%, which has given some spark to the bulls. I mentioned the Claims data yesterday and while the Initial Claims were lower, we are not seeing a continuing pullback at all which has the Consumer Discretionary Sector, XLY -.58%, under some pressure. If the Financials can continue to lead the way and outperform the general market, the sideline cash could be forced into equities for fear of missing a leg to the upside, which is where I think the real velocity could occur. See you After Hours.

Stock market averages are higher with help from economic data Thursday. Before the opening bell on Wall Street, the Labor Department reported that filings for jobless benefits decreased by 37,000 to 391,000 in the week ended 9/24. Economists were expecting a smaller decline of 9,000. Separate data showed third quarter GDP at a 1.3 percent annual rate, and .1 percent better-than-expected. Meanwhile, Pending Homes Sales fell 1.2 percent in August and .3 percent less than expected. In Europe, trading was orderly Thursday after German officials supported Chancellor Angela Merkel in approving a larger bailout package. The euro gained .4 percent against the dollar. Gold prices are flat and crude oil gained $1.89 to $83.10 a barrel. Through midday, the Dow Jones Industrial Average is up 162 points and the tech-heavy NASDAQ is flat. CBOE Volatility Index (.VIX) lost 1.88 to 39.20. Overall options volume is light again Thursday, with 3.9 million calls and 4.1 million puts traded across the exchanges through 12:45pm ET.

Bullish Flow
Mosaic (MOS) shares fell in morning trading after the company reported in-line earnings late-Wednesday, but the results raised concerns about weak potash prices. Shares hit a 52-week low of $52.61 Thursday morning. However, MOS is now down $2.09 to $55.10 and 4.7 percent off session lows. Options volume in the stock is running more than twice the daily average. 53,000 calls and 29,000 puts traded in Mosaic so far. October 62.5 calls, which are now 13.4 percent out-of-the-money and expiring in 22 days, are the most actives. 12,600 traded. The action includes a block of 9,500 contracts at 77 cents per contract, which was bought-to-open, according to data from the options exchange. October 47.5 puts and 65 calls on Mosaic are seeing active trading as well. The company's Analyst Day comes into play on October 6.

Hewlett Packard (HPQ) is up 76 cents to $23.95 and one of twenty-nine Dow stocks holding gains. Only Caterpillar (CAT) has slipped into the red. H-P shares ticked higher beginning in afterhours trading Wednesday on news the company has hired Goldman Sachs to fight activist investors. Early options trades on the computer maker include a 9,333-contract block of October 23 puts, which was sold this morning at 93-cents per contract. The position looks opening and to be a bet that shares will hold above $23 (-4%) through the October expiration (22 days).

Bearish Flow
While one player sold a large block of puts on Hewlett Packard (HPQ), another bought a bunch of puts on rival Dell Computer (DELL). Shares have added 18 cents to $15.08 and 10,000 February 16 puts were bought on DELL at $2.12 per contract. It's not a straight bearish play, because the block of puts was tied to 540,000 DELL shares, according to a source at the options exchange. Still, the purchase looks like a new position and seems to reflect expectations for volatility in DELL shares through the Feb 2012 expiration. Shares saw a two-day 12 percent skid on 8/17 and 8/18 after earnings were reported. The stock has since rallied 15.1 percent and recaptured those losses. It is now at the upper end of a one-month trading range. Today's put buyer is possibly bracing for the stock to reverse direction again and revisit the recent lows.

Proshares Ultrashort S&P 500 ETF (SDS) is down 40 cents to $24.28 and hit a morning low of $23.60 after the S&P 500 rose for a fourth time in the past five days. Order flow in SDS seems to reflect expectations for strength in the SDS (and therefore weakness in the S&P 500), as 71,000 calls and 15,000 puts traded on the ETF so far. The top trade of the day is an October 20 - 29 call spread bought at $3.40, 3000X. The investor bought the Oct 20s and sold the 29s, which is a position that will pay off well if the S&P falters and SDS rallies beyond $29 (19.4%) through the October expiration, which is in 22 days. By making a bullish bet on the short fund, the investor is making a bearish bet on the equity market.

Unusual Volume
Baidu.com (BIDU) options volume is running 2X the (22-day) average, with 164,000 contracts traded and put activity accounting for 57 percent of the volume.

Mosaic (MOS) options volume is 2X the average daily, with 83,000 contracts traded and put volume representing 65 percent of the activity.

Kinross Gold (KGC) options volume is running 3X the average daily, with 46,000 contracts traded and call volume representing 83 percent of the total volume.

Increasing options activity is also being seen in Focus Media (FMCN), AMD, and International Paper (IP).

Implied Volatility Mover
Focus Media (FMCN) sees relative weakness and higher implied volatility today. Shares of the Hong Kong-based ad agency are off $3.16 to $21.72 on no obvious company-specific headlines. Options on the stock are seeing brisk trading as well, with 13,000 calls and 18,000 puts traded in the name so far. Typical volume through midday is about 4,000. October 20 puts, which are 7.9 percent out-of-the-money and expiring in a little more than three weeks, are the most actives. 5,580 traded. Meanwhile, implied volatility in the options on FMCN is up 33 percent to 88.