The Dow 14,000 exuberance from the weekend has waned in a hurry, and indexes are currently sitting near their lows of the day. European markets saw broad-based selloffs today, much of which is carrying over into domestic names. Technology is the relative laggard today, with the Nasdaq currently off 1.5% amid sharp declines by AAPL, GOOG, and AMZN. The S&P 500 and Russell 2000 are both off by about 1%. Breadth is also weak, as decliners currently outpace advancers by over 3:1. Bonds are seeing a significant bid across the curve, as the TLT is up by 1.3%.
The surprise move of the day is occurring in the metals markets. Commodities typically trade in an inverse fashion with the U.S. Dollar, but despite a strong bid in the dollar(and thus, weakness by the euro), gold and gold miners are both up by 0.4%. While a single day of trading doesn’t make a trend, keep a close eye on this relationship going forward, as a continued bid in gold amid euro weakness would be a sign of the flight to safety trade once again being en vogue.
CHART OF THE DAY
DeVry Inc (DV) – Education stocks have been bludgeoned for some time now, and DV is no exception, down by about 35% over the course of the past 52 weeks. A look at the weekly chart below gives a better picture of just how bad things have become in that sector. That said, DV’s last earnings report looked favorable, and the equity rallied by over 20% in one day. The Bollinger Band width(bottom pane on the chart) has reached an extreme low, indicating DV is poised to make a big move.
DV is set to report earnings on Wednesday, and the options market is pricing in a very modest move for the report. That said, I like buying a March 25-straddle on DV ahead of this report, as options will likely see a spike in implied volatility into the numbers, and the stock could then see a big move(the past two reports for DV have resulted in over 20% moves in a day, yet the front-month straddle is pricing in only an 11% move). The March options are even cheaper than February on a volatility basis, so that is the preferred way to play this earnings report. This position profits if DV moves greater than $3.90 on either side of 25 by March expiration. Given the inflated short interest, fairly cheap options, and lack of directional bias into DV earnings, this looks like a good way to capitalize on a big move in either direction.
WHAT I’M EXPECTING
I’m looking for some near-term volatility, given the moves in European markets today. There have been signs of complacency creeping into the market, and the many newfound bulls could feel some pain over the next few days. That said, the primary trend remains higher, so have your dip buy candidates ready for the rest of this week. Given the strong bull market we’ve seen over the past few months, there are tons of support levels below for bulls to defend. The two key support levels to watch below are 1474 and 1450 on the S&P 500.