Gauging Investor Sentiment with Twitter: New Update

July 29th, 2013

by Blair Jensen

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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) painted a negative initiation thrust on Thursday last week. This generally means that a few more days of selling are ahead as a large number of traders on Twitter are raising cash or getting short near a market high. Friday morning saw some weakness in both price and sentiment, but both rallied into the close. The daily indicator has fallen sharply over the past several days as any weakness intra-day brings out the bears on the Twitter stream. Many traders just don't see a reason for the market to move higher so they're dancing close to the door.

Smoothed sentiment is reflecting the steep decline in sentiment on even slight downward moves in price. It is falling sharply and will need the daily indicator to print some moderately positive numbers early in the week to avoid a closure of the recent buy signals. Smoothed sentiment is also painting a pattern that mirrors price, which shows that there are a lot of traders chasing. Upward moves in price get them long, but the slightest down move has them running for the exits. It is interesting to note that the evident fear in sentiment is not showing up in our market risk indicator. This suggests that longer term investors are not as concerned as short term traders, which should resolve itself with higher prices after a shallow consolidation.

Over the past few weeks price on SPX ran up to a major Twitter resistance level at 1700 and is now consolidating just below. The range of tweets is very small with most of them targeting either 1700 above the market or the recent lows below the market. This is another indication that traders are either chasing price or waiting for a reason to take action. One thing that is a bit concerning with support and resistance levels is that traders are not aggressively targeting higher prices. This is in contrast to the breaks above both 1500 and 1600 on SPX over the past year. Once those levels were broken traders started targeting higher prices fairly quickly. The recent correction below 1600 and rally back above didn't bring with it the same enthusiasm. Price had to move within a few points of 1700 before renewed calls for that level appeared.

Sector sentiment turned somewhat bearish this week with the defensive sectors of utilities, consumer staples, and health care showing strength. At the same time consumer discretionary, technology, and financials are showing a slight negative bias from market participants. This is an early warning from sentiment that rotation to safety may be under way.

From a sentiment perspective we're seeing a lack of confidence by market participants. It appears that Bernanke's tapering talk has added a lot of indecision to this market. Small downward moves in price bring out the fear, while small moves up are met with chasing. Traders are reluctant to target prices either above or below the current market and rotation to safety may be underway. In short, the market is waiting for a reason to move and getting cautious while it waits.

Note : I've created a video that focuses on how I use the indicator to trade individual stocks.

Here's some written explanation about the video that clarifies some things and also describes what the annotations on the charts mean.

Here also is a download page so readers can load the sentiment indicator into their own chart packages. It's located here.

Here is an earlier YouTube video that a basic explanation of the indicator.

For additional background information on this indicator, see Gauging Investor Sentiment with Twitter.

Blair Jensen at Downside Hedge tracks Twitter sentiment and provides hedging strategies for individual investors.

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