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 exhibiting whiplash size moves on the daily indicator. Small moves in price in either direction are causing daily prints in both the +20 and -20 range. These are extreme readings for SPX and indicate that many traders on Twitter are simply responding to moves in price rather than making projections and trading accordingly. The volatile readings are also accompanied by intensity spikes, which show large segments of the herd shifting direction at the same time. The underlying intensity scores show a base of committed bulls and another base of skeptical bears, then a third group representing an additional 25% of intensity that is jumping back and forth between bullishness and bearishness.

Smoothed sentiment is responding by moving up and down in short vertical pops and drops. This indicates there is volatility in the actions of market participants that is not accompanied by large moves in price. This creates an unstable foundation for the market and brings with it risk. Although risk is rising, smoothed sentiment is confirming the move higher so the most likely direction is still up.

I’m starting to see a significant volume of tweets calling for 1810 and 1850 on SPX as the next upside targets which makes them resistance. While the tweets below the market put clusters of support mostly in the 1775 and 1740 areas. 1800 has acted as resistance twice on a short term basis. SPX has finally closed above that level, but just barely. As a result, it is still resistance, but any further move to the upside will change it to support.

Sector sentiment is painting a mixed, but slightly weak picture with both leading and defensive sectors showing strength while Energy, Basic Materials, and Industrials have a negative bias. Financial and Technology strength gives some support for the bulls, while strength in Consumer Staples continues to suggest that some market participants are moving to safety.

Taken all together, measures of sentiment from the Twitter stream suggest that committed bulls are holding, bears are raising cash or rotating to safety, while traders are chasing price. It provides an environment where price should move higher, but accompanied by increasing risk.

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.