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Thursday, March 28, 2024

Gauging Investor Sentiment with Twitter: New Update

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) gave a consolidation warning at the close on Wednesday this week. Smoothed sentiment finally broke below its uptrend line that has been in place for six months. It also closed below zero. The volume and intensity of bearish tweets has outnumbered the bullish tweets to the point that the trend of sentiment has turned down. When this occurs against the current trend of the market it serves as warning that a period of consolidation is likely. However, since it is against the trend it does not constitute a sell signal.

The daily indicator had held up fairly well in the face of declining prices, but the inability of traders to push SPX back above 1700 after several attempts resulted in bullish tweets drying up. Fewer traders tweeted reasons for the market to push higher while the bearish traders became more confident. It is interesting to note that sentiment declined enough to create a consolidation warning while SPX was still trading in the range between 1685 and 1700. After the break lower the daily indicator printed higher readings. Much of this is a result of many market participants who believe the 50 day moving average will hold as support.

Our sentiment indicator for Volatility (VIX) isn’t confirming the recent weakness in the market. The consolidation warnings in April had confirmation from volatility as sentiment for VIX was rising ahead of the weakness. Even the sharp rally in May didn’t have much impact on high readings for volatility. Currently sentiment for VIX is in a clear down trend which suggests traders don’t believe volatility will rise substantially in the near future.

The break below 1675 on SPX brought with it renewed calls for several levels below the market. The most often tweeted levels were 1650, 1620, and 1600. Market participants were still calling for 1700 and 1710 until Friday when it was clear that SPX would print a second weekly lower close. Now that the market is below 1675 which had been a major Twitter support level it becomes resistance.

Sector sentiment reflects weakness in technology stocks this week, but is otherwise indicating a healthy market with leading sectors showing a positive bias and defensive sectors such as utilities and consumer staples with weak sentiment readings. This suggests that a rotation to safety hasn’t begun.

Daily readings in sentiment are improving slowly as the market falls and defensive stocks not being bought aggressively are positives for the market. The consolidation warning and traders tweeting several levels of support below the market suggest more weakness. Although sentiment is sending slightly mixed signals I have to give the benefit of the doubt to the bears in the short term because a clear break of the 50 day moving average will almost certainly bring extreme negative sentiment on the daily indicator and a rotation to safety.


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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