Gauging Investor Sentiment with Twitter: New Update
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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) had its two highest intensity days ever on Thursday and Friday as the market fell. The intensity scores were nearly double their 50 day moving average. This indicates that traders were both excited and fearful of the fall in price. Thursday had a daily print of -26 which is fairly extreme. Friday however, came in with a barely positive reading even though SPX had a sharp selloff that morning.
Smoothed sentiment continues to be squeezed between a longer term uptrend and a short term down trend. This suggests a continued willingness by traders on Twitter to buy the dips. This is confirmed by many tweets mentioning a healthy correction rather than a change in the long term trend. In addition, there are a number of tweets calling for a bounce due to oversold conditions. Smoothed sentiment is also still above zero and has a very short term positive divergence with price which is another sign that stocks could move higher.
Support and resistance levels generated from the Twitter stream fell a bit with the market. The calls for lower prices increased significantly indicating that traders are fearful or are waiting for lower prices before committing money. The break below 1600 on SPX on a weekly basis moves that level from support to resistance, with 1618 and 1650 above that. The 1600 level was sold fairly aggressively going into the close on Friday. It is a level the bulls need to reclaim and the bears don't want to see again. Below the market support is now 1580, 1550, and 1540.
Another thing that we're noticing is bonds declining with stocks over the past month. Our sentiment indicator for long term US government bonds (TLT) is confirming the down trend. It went on a sell signal at about the same time as stocks started to fall. This implies uncertainty in the market and that investors would rather hold cash than either stocks or bonds.
Sector sentiment reflected across the board selling with only Energy and Financials holding up. This is more evidence that market participants are moving to cash rather than rotating between sectors.
From a sentiment perspective fear is rising, but there is still hope that the market can rally at least in the short term. If a rally materializes we want to see a clean break above 1600 on SPX that brings with it strong daily sentiment readings. This would indicate traders buying and cheering the rally. Any divergence or lackluster prints on the daily indicator would indicate that traders are selling into the rally or expressing disbelief. Of course, with evidence building that market participants are accumulating cash a bounce may not occur. Long story short, a rally needs to prove itself and a break lower will most likely accelerate.
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.