Almost every day the markets are inching higher after early morning selling. The last five trading days have either seen a gap lower or an early morning sell before the markets float back to the flat to positive side. So what does this mean? Why is this happening?
First, understand that the volume is key. The volume in this market has been insanely light for any month, especially January. Early morning dips are the result of increased volume from institutions on the sell side. After the first hour, the volume is too light for them to sell without hurting the market significantly. Therefore, they stop. The remainder of the day is retail investor buying. Last week saw the largest inflows of retail money into mutual funds since 2002.
The fact that institutions are selling and retail investors are buying should be a warning sign. Average investors always buy the tops on the market and institutions rarely get caught still in full positions at those same tops.
So where is the market heading in the near term? Over the next couple weeks this early sell, followed by a float higher should continue. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is only $1.00 away from its 52 week high of $148.11. Additionally, it is likely that 52 week high will be taken out with the SPY heading to $150.00. Once this level is achieved, most of the poor average investors would have bought in. Early February should bring rocky action and a decent decline into the markets. From $150.00, the SPY may fall to $142.00 if not lower.
The key to the future weakness is multi faceted. First, the technical charts are showing clear signals. Secondly, it coincides with the spending cuts and debt ceiling issues facing the United States. These stand as giants above the Fiscal Cliff resolution reached at the start of the year and have the potential to see the U.S. default as well as spin back into recession.
Be warned, good times should remain for the next few weeks. However, storm clouds lurk. For those of us who swing trade the market, amazing opportunities are everywhere.