Stocks are off sharply today, but the big news continues to be the extreme weakness seen in gold and silver. Friday saw a big down move for the two commodities, but today’s selloff is even worse. Currently, gold is off about 8% on the day, with silver over 10% lower. There is much speculation as to what caused this sharp move lower, but the reality of it is this there are likely many heavy longs that are getting margin calls, and full-on panic has hit these markets.
Stocks are sharply lower, led by the Russell 2000, off nearly 3% on the day. All other major indexes are down a little over 1% for the day. Bonds are seeing a bid, up about 0.6%, but the flight to treasuries isn’t as big as you would expect, given the broad-based weakness seen in risk assets. Volatility is spiking significantly, as the VIX is up over 20% on the day.
CHART OF THE DAY
Best Buy (BBY) – The previously-hated BBY has been very strong this year, as the stock has doubled since January 2. The shares recently spiked to the 26 level, and have since consolidated near their 20-day moving average. Despite its extreme strength over the past three or so months, sentiment remains very sour toward the stock. Currently, there are 1.4 puts for every call in the front three months’ option open interest. This reading ranks in the 92nd percentile of all readings over the past 52 weeks, and is near a bearish extreme. This creates the potential for an option-related unwind, which would drive the shares even higher.
I like a long entry here with a stop on a close below 23. I would initially target a move back to 26, with 30 as a stretch target.
WHAT I’M EXPECTING
A continued period of high volatility. Until metals markets can stabilize, it is very likely that we will see wild swings in all asset classes. For this reason, keep your exposure light until we can get some clarity going forward. Many funds and large traders surely saw margin calls and forced liquidations over the past few days, so these funds will likely be looking to reallocate in the near future.