Below the radar bullishness
05/24/18

For a stock trading in the red yesterday, DaVita (DVA) sure had a lot of bullish options activity.

Well, it was in the red for a little while, at least. The Colorado-based health care company, which specializes in kidney dialysis, was underwater for the first 45 minutes or so after the opening bell, despite appearing on three LiveAction options scans in early trading: unusual overall options volume (six times the daily average), unusual call options volume (nine times average), and high call/put ratio (second highest, below).

LiveAction high call/put ratio scan, 5/23/18. Heavy DVA call options volume

Source: OptionsHouse


A little more than an hour into the session, though, DVA had flipped into the green—despite broader market weakness—and appeared to firmly establish itself in positive territory later in the session. It also rallied off a three-day low to close toward the top of its daily range.

The S&P 500 Healthcare sector had been holding its own over the previous five days, but it was hardly running away from the pack (+0.3% vs. -0.37% for the S&P 500), so it didn’t appear as if DVA was the beneficiary of unusual interest in its industry.

The stock has been on a nice run lately, though. The following daily chart shows DVA spent the better part of April in a trading range before busting out to the upside on May 4 after the company’s Q1 earnings release, which beat estimates and revealed DaVita’s revenues had increased 33% on a year-over-year basis.1 The market liked what it heard, and the stock rallied around 9% from May 1 to Monday’s swing high before pulling back the past couple of days.

DaVita (DVA), 3/8/18 – 5/23/18. DaVita (DVA) price chart. Rally out of base

Source: OptionsHouse


The weekly chart inset shows the stock peaked in mid-2015 above $85; the January high topped out a little shy of $81, after DVA bounced off a long-term support level in the vicinity of $52.50 in November 2017.

Despite yesterday’s modest stock trading, below the radar options traders certainly seemed interested in DVA—and mostly on the bullish side: Aside from the high call/put ratio, note that although overall options volume at the time of the LiveAction scan was running around six times average, call options volume (at nine times average) was accounting for the bulk of that activity. DVA put options volume was within normal bounds.

That action suggests there may be more going on with DVA than meets the eye.

Memorial Day market patterns: Back in days of yore, the four-day trading week following the Memorial Day holiday had a reputation for providing a bit of a bullish bump in what was often a slack period for the market. (Contrary to popular perception, though, May hasn’t been a bad month for US stocks). Why? Who knows, although general optimism about the unofficial arrival of summer is as good a guess as any.

Overall, since 1971, when the holiday was set to the last Monday in May, the S&P 500 has gained ground 62% of the time during Memorial Day week, posting a median gain of 0.61%. That’s much better than the index’s performance for all four-day periods since May 1971 (a 0.23% median gain and a win rate of only 55%).

Since 2009, though, Memorial Day week has been more of a mixed bag. It’s had a negative average return, having gained ground in only four out of the past nine years, and has tended to alternate between up days and down days. One relative constant, though: Thursday of Memorial Day week, which has closed higher 62% of the time since 1971, and seven out of the past nine years.

 

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1 Zack’s.com. DaVita (DVA) Beats Q1 Earnings Estimates, Reiterates View. 5/8/18.