Markets are trading sideways yet again, as they await the next catalyst to spark a move in either direction. The S&P 500 remains trapped between the highs near 1475 made last year, and 1450, the level of intraday lows seen on 1/8. Equities sold off on the open, but have since firmed up and are down only slightly on the day. Presently, the S&P 500 and Russell 2000 are each off about 0.2%, while the Nasdaq is trading near breakeven. Bonds are currently trading near their highs of the day, up about 0.5%, while metals are lower by about 1%.
One piece of interesting news that surfaced today is that equity markets actually saw big inflows last week. In fact, the $22.2 billion seen entering the stock market is actually the second largest weekly inflow in history. While this isn’t totally surprising, given last week was the first of the 2013 trading year, the sheer size of these inflows can be viewed as a bit troubling for bulls. As a general rule, trading with the “herd” is a losing proposition, and such evidence of bull market acceptance by many participants could be a sign that we’re getting overextended to the upside.
CHART OF THE DAY
AOL, Inc. (AOL) – The weekly chart of AOL below shows that the stock has cooled off a bit after a massive run in 2012. However, I believe the current pullback to be a viable buying opportunity in the name. Going back on a chart to 2010, you’ll notice that the 30 level was a key resistance area. With AOL now sitting above this price, it could act as support. Another reason for my bullish view on the equity is the recent extreme bearish sentiment that has crept in. Short interest now sits at 13% of AOL’s float, and the amount of total short interest jumped by 87% in the past two weeks alone. Additionally, the front three months’ options has a put/call ratio that sits the 98th percentile of all readings taken over the past year. Given this, coupled, with the massive jump in short interest, I believe there could be a nice short squeeze right around the corner. I’d look for an entry here with an immediate target of 32, and a stretch target of 37.50, site of the gap down from 12/3. Should AOL close below 29, it would be a sign to exit the position.
WHAT I’M EXPECTING
Given what I said about the equity inflows above, I’d look for one last strong move higher, and then maybe the potential for a reversal. Market tops typically don’t take this long to form, but rather they occur at extremes in bullish sentiment. The recent inflows are a good indicator that we’re nearing the place where bears could capitulate, but not quite yet. Going forward, in my opinion, there’s a very good chance we break above the 1475 highs and rally toward 1500. Once there, I’ll be looking to book profits and get lighter.
Next week will likely be an important one for the markets. There is a good deal of economic data to be released, but more importantly, most of the financial companies are set to report earnings. Given this, I see the potential for a big move into options expiration on Friday.