Another day, another climb up the wall of worry. Markets were weak off the open this morning, but that selloff was met with responsive buying, as equities are currently near their highs of the day. While small caps are outperforming the S&P 500, the Nasdaq is actually leading us today, up 0.7%. The S&P 500 and Russell 2000 are both up about 0.5% at present levels. Bonds are seeing a sharp selloff, down 1.4%, while metals are once again weak — gold is down 0.6%, while silver is down 1.8%. Perhaps the most noteworthy move in the metals space is the gold miners, which have been very weak over the past few days. GDX, the gold mining ETF, is off 2.7% today.
CHART OF THE DAY
Coinstar (CSTR) – With Netflix (NFLX) all the rage after its blowout earnings report two days ago, there exists the possibility that CSTR shorts are getting very nervous, and could capitulate on their positions ahead of its quarterly earnings on 2/7. The equity has been less than steallar over the past year or so, but there are signs that it could be forming a bottom. Taking a look at the chart, you’ll notice a sloppy, but defined bullish inverse head and shoulders pattern on CSTR. These patterns occur near the bottom of downtrends, and can often times signal a reversal in the making.
Given its massive short interest of 47% of the equity’s float, any positive news on the CSTR front could spark some serious covering. In addition to the growing short interest levels, options traders have been piling on the bearish plays lately, with current put/call open interest sitting in the 90th percentile of all readings over the past 52 weeks. Capitulation by these traders could further add to the fire.
This isn’t a high-probability setup, but the risk/reward tradeoff more than offsets the potential that the trade doesn’t work. I like an entry here, with a close below the 49 level being a sign to exit the position. I’d initially target a move to 55, then up near 60, site of the gap down from 7/26. Should CSTR see a big rally ahead of earnings, it would be wise to take some off the table and/or hedge into its quarterly report.
WHAT I’M EXPECTING
Bears were very eager to fade the 1500 level on the S&P 500 yesterday and today, and for that reason, I’m looking for a squeeze this afternoon and potentially next week. Sentiment polls continue to show growing optimism, but until the rally is widely accepted, it is unlikely that we’ll see any significant pullback. 1474 continues to be the level to trade against from the long side. Also, pay close attention to the 900 level on the Russell 2000, which is currently trading at 904.