Over the past week our core market health indicators compressed a bit. Some shuffling occurred with our measures of market quality moving from barely negative to barely positive while our measures of the economy fell from positive to negative. Our measures of trend and strength fell slightly. Perceptions of risk rose. The flip flop in the economy and market quality keeps our core portfolio allocations the same with the long/cash portfolios 80% long and 20% cash. Our hedged portfolio is 90% long stocks we believe will outperform the market and 10% short the S&P 500 index (using SH). The overall picture suggests that portfolio managers are holding, but could change their mind very quickly. Small moves in price are causing many of our core indicators to jump quickly both up and down. This is a sign of investors dancing close to the door and that they aren’t willing to sit through a consolidation at the moment. Much of the movement could simply be people protecting gains going into the end
Now that I’m quantifying StockTwits messages in addition to tweets on Twitter we can do some comparisons between the two communities. Something that I noticed last week was that the StockTwits indicator diverged from price as the S&P 500 Index (SPX) broke above 1800. At the same time the Twitter indicator moved higher with price. When one of our sentiment indicators moves higher with price it generally confirms the move. A negative divergence gives warning that hedging, shorting, or a lack of buying is occurring by traders and investors. We currently have a situation where StockTwits is providing some early warning while Twitter is painting a pattern that confirmed the initial move, but then moved quickly lower when price fell back below 1800 on SPX. Traders on Twitter appear to be chasing while traders on StockTwits didn’t chase price above the 1800 level. If the market can regain 1800 I’ll be watching for smoothed sentiment on StockTwits and Twitter to move above their previous peaks. Without that confirmation I suspect
I shared this chart on StockTwits and Twitter last week. It is one of the charts I like to watch and it is providing some early warning that we’re getting closer to a top. In the past when the ratio between the S&P 500 index equal weighted (SPXEW) and the S&P 500 index (SPX) has fallen below its 20 week moving average it has signaled a top. This measure is often early and sometimes wrong, but still something to keep in mind. At the minimum it is providing early warning that money is moving into the the stocks with the largest market capitalization which often happens when money managers are moving to what they consider safer stocks. If more signs of a flight to safety show up in the coming weeks we’ll most likely see a correction of a larger magnitude than we’ve seen in the past year.
Our 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 shows 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
The market continues to press higher without fear. There is virtually no perception of near term risk by investors. However, as I mentioned yesterday I’m seeing weakness in some of our internal measures that suggest all is not well in the market. The strong rally out of the October lows hasn’t been met with strengthening of our core health indicators. Instead, they’re starting to compress near the zero line. It appears that those who have participated in the rally this year and have large gains are taking profit and rotating to defensive stocks. While investors who missed the big gains are chasing higher prices. As a result, our indicators aren’t moving much above or below zero and indicate an unhealthy rally is in progress. It won’t take much weakness in our indicators to raise more cash and add a larger hedge to core portfolios even if the market continues to rise. On the flip side it won’t take much underlying strength to move us to a 100% long position. As
The consolidation warning issued on 11/7/13 for the S&P 500 Index (SPX) from quantified tweets has been closed. This raises the odds that the prevailing trend will continue in the near to mid term. Just like the signal from the StockTwits stream it appears that the Twitter stream has created a whip saw. There aren’t a lot of upside targets above 1800 for SPX on Twitter so the next few days will give us a better picture of potential risk/reward. A dearth of tweets at higher levels will suggest an unfavorable risk/reward scenario.
Today the S&P 500 Index (SPX) finally cleared the 1775 resistance area created from gleaning price targets from the Twitter stream. We first identified the 1775 level as strong resistance on 10/19/13. Then reiterated that level as a point that would be shorted by traders on 10/26/13. 1775 was hit at the last of October, then price traded sideways for the next two weeks as the bears tried to push the market lower. This is a pattern that I’ve seen repeated several times over the last year and a half. When a large number of traders target the same level, price almost always reacts when it gets there. This is one of the benefits of following the whole market instead of just a few traders. Nimble traders can use Twitter support and resistance levels for quick scalps. I usually wait for the market to make a few daily closes above an important resistance level before removing it. In addition, smoothed sentiment from Twitter for SPX, RUT, and QQQ haven’t cleared
The consolidation warning for the S&P 500 index (SPX) generated from quantified StockTwits messages on 11/8/13 has been cleared as of the close on 11/12/13. The move in smoothed sentiment back above its down trend line clears the warning. Since the warning came so close to the apex of a triangle this move higher could simply be a whipsaw similar to what we saw with the Nasdaq 100 (QQQ) earlier in the month. The next few days will most likely give us the answer. There are still a very large volume of tweets targeting 1775 on SPX as resistance. If that level is overcome the market will most likely push to 1800 before pausing again (with sentiment confirming the move). If price stays below 1775 then I suspect we’ll get another warning from quantified StockTwits messages. I’ll post another update when the picture becomes clear. Here’s the chart for QQQ that shows the whipsaw. It is currently still warning.
Breadth for the 50 most active stocks on Twitter held steady last week, however, there is still a negative divergence with price. Below are charts with the breadth and current status of the 50 most active stocks.
At the close on Friday a consolidation warning for the S&P 500 Index (SPX) was issued from quantified StockTwits messages (sentiment). A consolidation warning occurs when then trend of quantified messages is broken to the downside after diverging from price for more than three weeks. The rally out of the October low was met with decreasing sentiment on almost every push higher. One thing to note is that the current drop in sentiment is due to an increase in bearish messages, while the bullish messages stayed the same. This suggests that the bulls are still committed, but the bears see current prices as a good place to short. Please note, a consolidation warning is not a sell signal. It is simply a recognition that bearish sentiment is overwhelming bullish sentiment at the moment and that the market may need to consolidate before moving higher. The Twitter stream is filled with Tweets mentioning 1740 on SPX as strong support and 1775 as strong resistance. This gives us some good levels to