Gauging Investor Sentiment with Twitter: New Update
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The Downside Hedge Twitter Sentiment indicator for the S&P 500 Index (SPX) continues to paint lower highs over the past week. We're seeing a pattern that shows traders have less enthusiasm on up days and more negativity on down days. Large percent up days are only getting neutral sentiment readings in the +6 or + 8 range. While down days garner fairly negative readings in the -15 area. This indicates that traders are somewhat skittish, and their interest in getting short or protecting gains outweighs their desire to take on more risk at these levels. The volume and intensity of tweets on the down days is further evidence that any weakness brings rising fear.
Smoothed sentiment rallied with the market over the past few weeks, but was turned back convincingly at the zero line with the weakness on Wednesday and Thursday. Price on SPX is 8 points higher than when we got our first warning from smoothed sentiment on 1/29/13, however, sentiment is much lower. This indicates that the recent drop in price is causing market participants to become cautious.
Last week SPX pushed just above the Twitter resistance level of 1525. As it rose to 1530 we got a few tweets calling for higher prices. However, the market quickly reversed. Its inability to hold 1525 on a retest brought the selling we expected that carried back to the 1500 Twitter support level. Friday saw the market bounce at support and we're now in the middle of both support and resistance. The bulls need to hold 1500 and the bears need to keep prices below the 1525 to 1530 level to continue the fight. A move out of the recent range will give us a winner and a direction.
One thing of note is on the test of the 1500 support level on SPX we started to see a very large number of tweets calling for a fall to the 1460 to 1475 level. Most of the tweets were near 1470, so we'll keep that as our lowest support level. The rising number of traders targeting prices below the market is one more indication that bearish sentiment outweighs bullish sentiment.
With smoothed sentiment still below zero and continuing to negatively diverge from price, we don't expect an immediate run to significantly higher levels. Our expectation is that any further rally will experience some headwinds and short selling if it gets into the 1525 or 1530 area. The number of tweets calling for lower prices should also act as a magnet. As a result, we expect to see some sloppy action or weakness in the week ahead.
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.