Gauging Investor Sentiment with Twitter: New Update

Courtesy of Doug Short.

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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) is printing fairly tepid readings on a daily basis when compared to the strength in price. Most of the readings have been below +10 due to a lot of tweets showing traders and investors taking gains and reducing exposure to the market. The tone of tweets shows cautiousness and a general consensus that the market is overbought and needs to pause.

Smoothed sentiment moved quickly higher with the market, but has turned over near the moderate level of +10. This is a level that has in the past coincided with an easing in sentiment as the market drifts sideways or higher. This suggests that we’ll see some small consolidation this week.

Support and resistance levels generated from the Twitter stream tightened significantly this week. The vast majority of Tweets were for 1670 and 1700 on SPX. 1680 was the next most tweeted level. This is a telling indication as traders are not willing to predict prices more than 1% either above or below the market. Over the past several weeks the range has coiled from 100 points (1600 to 1700) to just 30 points (1670 to 1700). This suggests that a break of either level will see prices move quickly in the direction of the break. There were still calls for 1650 and 1625, but in fewer numbers and they slowed down as the week progressed. So we have an interesting situation where 1700 is our only resistance level, while support comes in at 1680, 1670, 1650, and 1625.

Twitter sector sentiment is showing the most strength in Industrials, Basic Materials, and Health Care. The most weakness is in the defensive sectors of Utilities and Consumer Staples. This suggests traders and investors are positioned for higher prices.

From a sentiment perspective the market should move higher, but needs some time to rest. Smoothed sentiment is positive, but has turned down. The sectors show an underling bullish bias. And support and resistance levels show an unwillingness by traders to commit and a tightly coiled range. Added all up, the market should drift until the range between 1670 and 1700 on SPX is broken.

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.

Blair Jensen at Downside Hedge tracks Twitter sentiment and provides hedging strategies for individual investors.