Gauging Investor Sentiment with Twitter: New Update
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This week the Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index had the highest daily reading since we began calculating it. The record high reading signified confirmation of the close on SPX above 1422. Our smoothed sentiment indicator has strengthened over the past three weeks, but is still painting a series of lower highs for the entire rally out of the June lows. This comes as a result of many market participants tweeting over the last three months that this rally can't last due to market valuations, economic concerns, and tail risk events such as the Euro crisis.
Recently we've seen a high volume of tweets talking about the current move above 1422 in the S&P 500 Index being a false break to the upside. Many traders are positioned net short and not afraid to be so. They cite technical factors such as the Dow Jones Transportation Average breaking down and fundamental concerns on the economy as reasons to avoid the market.
A resistance level or price target of 1440 on SPX has been mentioned so overwhelmingly in the past week that any move above that level could bring with it a flood of short covering. We think it possible that a short covering rally could take SPX quickly to the next line of major resistance at 1500.
On a continuation of the rally we'll be watching for a shift in our smoothed sentiment indicator that breaks the recent highs and more importantly gives a reading above zero. We believe that a positive shift in sentiment could create a substantial rally as it will represent the recent wall of worry breaking. This will cause demand for stocks as traders and investors buy in fear of missing the next move up. There are a few calls way above the market at SPX 1600. We feel that only a rotation out of safety and into risk could fuel a rally to that level.
Below the market we have a few isolated calls for 1280 and 1375, however, the vast majority of tweets put in a floor of 1390 to 1400. So the important support and resistance levels to watch are 1390 on the downside and 1440 above.
For 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.