Gauging Investor Sentiment with Twitter: New Update

August 5th, 2013

by Blair Jensen

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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) moved quickly higher this week as the market moved to new highs. The Twitter stream had a large number of tweets cheering the highs and it appears that the bears have resigned themselves to at least one more push higher before a substantial correction can start.

Smoothed sentiment bounced from a long established up trend line and has also moved back above zero. This is encouraging and suggests that the market should move higher. However, one concern is that such a small consolidation below the 1700 level on SPX caused both daily and smoothed sentiment to fall so rapidly. Traders were quick to short the market on weakness below 1700. Now that the market is above that level bulls want to see a lack of traders willing to go short on such slight dips.

As the market moved higher so did support and resistance levels generated from the Twitter stream. Major support for SPX is now near the recent lows in the 1670 to 1680 area. With SPX above 1700 that level flips from resistance to support, although I'd like to see it above that level for a few more days before calling it major support. Resistance is near 1725 to 1730. The majority of tweets are for prices above the market however, the targets are not very far away from the current level. Once again, traders are reluctant to make projections for substantially higher prices. One theme I see in tweets is that short covering and chasing may push the market a bit higher, but it is too extended to move up substantially. This is another sign of caution among traders.

All of the major sectors have a positive bias on the Twitter stream. Last week the defensive sectors showed a slightly positive bias while leading sectors were slightly negative. This could indicate that some rotation to safety is underway, but more evidence is needed to make a call.

Overall sentiment has a positive bias, but with a sprinkling of caution. Traders aren't targeting substantially higher prices and defensive sectors are showing a positive bias. But, with smoothed sentiment respecting a long established up trend line we have to conclude higher prices are ahead.

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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