50-Day Moving Average Now Support 10-10-2011

Cusick's Corner
Today's move to the upside did deliver on my view that the risk in this market is a high velocity move to the upside, with all the offensive and major sectors, XLF, XLE, XLK, XLY, XLI, outperforming the S&Ps. While the volume might have been on the light side due to the banking holiday, this is a move that the under-invested manager cannot ignore. If the headlines out of the EU stay positive, this trend could gain some further stimulus. I will be watching the mid range moving averages, specifically the 50-Day, which has now become support. With this resistance now out of the way, we may be paving the potential for highs that we have not seen since summer. See you Midday.

Stock market averages traded higher through midday and extended the gains in afternoon action Monday. With no economic data on the calendar and bonds closed for Columbus Day, the early focus was on Europe. German and French officials reached agreement over the weekend on bailout funds for troubled banks and the news helped send equity markets rallying across the Eurozone. Germany's DAX paced the advance with a 3 percent gain and, at the same time, the euro surged more than 2 percent against the buck. Diminishing fears about the debt crisis and the risk to the global economy seemed to help support higher oil prices as well. Crude added $2.80 to $85.78 per barrel and gold rose $42.2 to $1678 an ounce. Meanwhile, the Dow Jones Industrial Average was up 265 points midday, rallied into the close and finished up 330 points. The tech-heavy NASDAQ surged 86.7 points.

Bullish
Plains Exploration (PXP), a Houston, TX oil and gas company, saw high options volume today. Shares added $1.72 to $25.59 and 37,000 contracts traded on the stock, which is about 6.5X the recent average daily volume, according to Trade Alert data. Much of the activity was due to one spread. In this strategy, the investor sold 10,000 November 22 puts on PXP at 96 cents, bought 10,000 November 26 calls at $2.04, and sold 10,000 November 31 calls at 57 cents. In other words, they sold Nov 22 puts to buy Nov 26 - 31 call spreads and paid 51 cents for the three-way package, 10000X. The investor is probably a willing buyer of the stock at $22 (-14%) and is writing naked puts, but also wants exposure to the upside and is buying the call spread. PXP has performed well lately and is up 26.4 percent in the past week. Still, shares are well below the highs near $42 set in July and today's spread trader is possibly looking for the stock to recover some more of its losses through mid-November.

Bullish trading was also seen in Genworth (GNW), Celgene (CELG), and Forest Oil (FST).

Bearish
AMR was the subject of impressive spread trades today. Shares lost 35.1 percent last Monday after analysts and media reports raised concerns about the airliner's cash flow. However, the stock is up in four of the past five days and has added 31.8 percent since that time. Options volume in AMR today was 52,000 puts and 5,940 calls. Most of the put volume was the result of spread trading, in which one or more investors were selling January 2.5 puts on AMR and buying January 1 puts. 25,000 traded and data from the options exchange suggest that the investor was closing out the 2.5s to open in the January 1 puts. That is, a bearish position was being rolled down in strikes. A shareholder might have initiated the trades to adjust a stock hedge.

Bearish trading was also seen in Tempur Pedic (TPX), Weight Watchers (WTW), and Harbin Electric (HRBN).

Index Trading
Trading was slow in the index market on Columbus Day. Treasury markets were closed and no economic data was released Monday in observance of holiday. 456,000 calls and 756,000 puts traded on the S&P 500 Index (.SPX), S&P 100 Index (.OEX), and other cash indexes, which is about 79 percent the average daily volume over the past month, according to Trade Alert data. The S&P 500 Index surged 39.43 points to 1,194.89 and CBOE Volatility Index (.VIX), which tracks the implied volatility of SPX options, fell 3.18 points to 33.02. VIX is on a one-week 27.4 percent losing skid and now well below the levels seen last Monday, when the index closed at 45.45. The decline in the volatility index reflects the sharp decline in risk perceptions seen over the past five days.

ETF Action
iShares Japan Fund (EWJ) saw high volume. Shares added 24 cents to $9.62 and 70,000 contracts traded in the ETF today, which is 5.5X the daily average. A large spread surfaced in the Japan fund midday when one strategist sold 30,000 December 10 calls on the fund at 20 cents and bought 30,000 March 10 calls at 40 cents. They paid 20 cents for this Dec - Mar 10 call spread and are possibly looking for shares to hold below $10 through the December expiration and then rally from that point forward. Or, it might be a roll - i.e. closing out December to open a new bullish position in March. Either way, the trading activity seems to be a bet that Japan's equity market will perform well through March 2012. EWJ is up 3.3 percent in the past week, but still below the highs seen in mid-Feb when shares hit $11.63.