Chris Tyler, Optionetics.com
January 31, 2011

Bulls protest Friday’s technical u-turn on modest bargain-hunting off the first of many potential layers of bear control. As of 11:15 ET the SP-500 (SPY) is up 0.45% after taking a minor detour from a still uncorrected 21-week cycle.

Following Friday’s hard geopolitical-driven smack-down from “Highways 1,300 & 12,000”, bulls are looking to hold early January supports on this last trading day of the month.

Window dressing and a stiff but not fully-stretched VIX ($VIX) aside, investors are benefitting from light but influential earnings, M&A news and maybe increased risk tolerance on the part of investors despite continued civil unrest in Egypt and possibility of violence spreading in the Middle East.

On the earnings front, energy giant Exxon Mobil (XOM), the SP-500’s largest capitalization component, reported better-than-expected results and is certainly aiding Monday's market bid.

Exxon Mobil managed profit growth of 53% on an earnings beat of $1.85 per share compared to estimates of $1.63. Revenues also grew by a stronger-than-forecast 17.1% from the year ago period. Intraday and much to the relief of bulls, XOM is up an influential 1.15%, hitting fresh margin intermediate highs and continuing its uncorrected run of 35% since its July lows.

“Merger Monday!” headlines have enjoyed some wear and tear this morning and acted as a support as bulls take the report as a sign of investor confidence in the market. Over the weekend, Massey Energy (MEE) announced its being bought by peer Alpha Natural (ANR) in a cash and stock deal worth $7.1B, representing a premium of 21% to Friday’s close.

The deal between Alpha and Massey will create the second largest coal producer in the United States by market capitalization and should help put an end to Massey’s ongoing litigation involving mining safety violations. Intraday, MEE is up9.50% and ANR off by -8.10%.

On the economic front, reports this morning have been pleasant on a visual basis for bulls. Income and spending data for December rose by a better-than-expected 0.8% and 0.7%. Analyst forecasts called for 0.5% and 0.6% respectively. Separately, Chicago PMI for January gained two points to 68.8 compared to estimates of 65.0 and a drop from a prior reading of 66.8.

In those sometimes intertwined markets of influence, the possibility of growing unrest both Egypt and the rest of Middle East has continued to support higher oil prices as bulls (and bears) brace for potential supply problems. The US Oil Fund (USO) is adding another 2.00% on top of Friday’s explosive 4.56% gainer off key up-channel support from a corrective pullback.

Not acting very sympathetic, shares of sometimes-safe haven vehicles Comex gold (GLD) is meddling around the unchanged level after gaining 1.84% Friday. The US Dollar (UUP) is actually lower by -0.60% as its safe-haven status loses its luster. And silver (SLV) looks to be the more precious metal Monday as it gains 1.35%.

Elsewhere, shares of Intel are off -1.00% and testing 50SMA support. Shares were halted intraday after the company reported it was cutting its Q1 revenue forecast by $300M related to costs tied to correcting a design flaw in one of its chipsets unrelated to its important CPU market.

Finally and in those sometimes accurate heat-seeking option markets, trading in Sohu.com (SOHU) is seeing above average call side participation. The China-based internet portal beat by $0.08 on stronger-than-expected sales of and guided its Q1 earnings outlook above estimates and shares are up 4.50% intraday.

Implieds have hit their lowest trading levels of the past three months on an expected volatility crush into the high 30s. The end result is premiums are down near fair value compared to statistical underlying volatility. Most active, the now in-the-money Feb 75 call has traded a bit more than 2,000 contracts.

With open interest of 2,273 and implieds near 38% mid market, the activity is unlikely of the heat-seeking variety and quite possibly representative of traders closing long positions, as much as anything.

Liquidity is admittedly slightly weak but not prohibitive for outrights, verticals or calendars. Technically, shares of SOHU are working on the right side of a weekly first-stage base after a count reset from a recent attempt at fresh intermediate highs and a much larger 2.5-year “W” base taking shape.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site