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) printed several extremely high readings (greater than 30) and a few moderately negative readings (less than 15) over the past few weeks. The underlying data shows the bears in complete capitulation when the market rises and the bulls disappearing if price falls. These are uncharacteristically wide swings which indicate neither bulls nor bears have strong conviction and creates an unstable environment.

Smoothed sentiment shows traders simply chasing price higher but bailing at the first sign of weakness. It almost perfectly mirrors price coming out of the December low, but then fell rapidly on a 1% decline in the indexes. The overall tone is nervousness, but not panic.

Traders have not tweeted a lot of targets below the market over the past few weeks, but mentioned 1850 on SPX almost nonstop (which is seen as the line of red dots near 1850 on the chart above). Once again, a Twitter resistance level acted as a magnet then the market paused. The lack of tweets for lower prices indicates that traders aren’t extremely fearful, but at the same time aren’t comfortable projecting where the current decline will end. If the market continues to decline, we’ll want to see a lot of tweets creating a support level. For now the best support levels are 1800 and 1765.

Sector sentiment is showing a rotation to Financials, Industrials, and Basic Materials. Technology and Consumer Staples have the most weakness. The defensive sectors are still positive which suggests that there is also a bit of rotation to safety underway.

From a sentiment perspective market participants are nervous but willing to chase price if it goes higher. Lack of strong conviction, wide swings in the daily indicator, and no clear support levels create some instability so this is a time to watch market internals closely on further weakness.

Our Twitter sentiment indicators for individual stocks had a very good year in 2013. Simply buying the 10 most bullish stocks on Twitter at the first of every month beat the S&P 500 Index by 9%. Trade signals generated for individual stocks had a 75% win rate with the winners averaging over 13% while the losers lost less than 6%. But we all know that everything works in a strong bull market. 😉 I hate to say it, but I’m kind of hoping for some downside movement just to see how the indicators work in a bear market.

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.