Gauging Investor Sentiment with Twitter: New Update
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The Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) has now given every warning it can of a possible correction ahead for the market. Daily sentiment continues to make lower highs and lower lows as the market grinds higher. On Thursday it painted a negative initiation thrust, which often precedes 3% to 5% dips in the market. We didn't get the dip we expected. Instead, the market moved back and forth with expanding ranges in price (a situation that signals uncertainty). Friday, the market broke out to new highs, but daily sentiment had a negative print. This is another small warning that the bears are fighting every move higher.
Smoothed sentiment has been diverging from price for over a month, has broken below its confirming uptrend line, and also broken below zero. The move has been so sharp that it will have a hard time doing anything but continue to diverge from price if the market moves higher over the next week. We're starting to see more tweets about a longer term top being put in place, which is adding to the weight in sentiment.
A few weeks ago we mentioned the volume and intensity of tweets had risen substantially as the market moved into the 1490 to 1500 area on SPX. We've placed the "volume" on the chart above to illustrate the situation. Please note that what we are calling volume is really aggregated scores of all tweets (both positive and negative). Each tweet is scored on a scale (not simply designated as bullish or bearish). When scoring a tweet, our computer system looks for events, actions, technical chart patterns, intensity of language, and the tweeters ability to clearly express their opinion. So the volume bars don't simply represent the number of tweets scored. They also contain weight based on a tweeter's rational for their bias.
Once we saw the numbers in graphic form, one thing stood out. Volume has risen above the average of the last 50 days near market turning points. Not only does the number of tweets rise, but people's opinions get stronger and contain more substantiating proof for their beliefs. For now this is a simple observation, since two instances isn't even close to a meaningful sample set from which to draw any conclusions. So we certainly can't say whether the increased volume portends a market turning point ... but it is still interesting to watch.
Twitter support and resistance (not shown in the chart) compressed this week as traders moved their focus to 1525 on SPX as resistance rather than 1550. So we now consider 1525 as major resistance and 1550 as minor resistance. The lowering of expectations brings resistance back in line with sentiment. Resistance is only a few points above the market, while support is much farther below current prices at 1500 and 1470. This suggests negative risk/reward for traders wanting to go long.
With sentiment so clearly negative, we believe the market will have a hard time moving a lot higher. It is reaching levels where both traders and longer term investors are raising cash or hedging their portfolios. Lower expectations for prices above the market should also mute any moves higher.
Note: I have created a download page so readers can load the sentiment indicator into their own chart packages. It's located here.
Note from dshort: Here is a YouTube video in which Blair gives an explanation of the indicator and examples of how he used it in his posts over the last several weeks.
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.