For the past few months Twitter sentiment for the ETFs that track the Nasdaq 100 Index (QQQ) and the Russell 2000 Index (IWM) have been painting a pattern that shows indecision by traders. Each move up in price is met with high sentiment and each move down garners a lot of negative tweets. This is causing our smoothed Twitter sentiment indicator to mirror price. When sentiment mirrors price it shows us that traders are chasing. Their tweets are reacting to price rather than predicting it.
Smoothed sentiment for QQQ and IWM are currently showing very wide swings from bullish to bearish. This uncertainty is not a normal condition for actively traded and tweeted stocks. Instead, as momentum builds for a stock, Twitter sentiment starts to trend with the stock in a well defined range. Traders show confidence in their positions with a majority of tweets confirming the trend. In up trends, down days don’t show large negative prints in daily sentiment which helps smoothed sentiment continue to rise (and confirm the trend).
When smoothed sentiment starts to show wide swings it indicates indecision. Traders lose confidence in their positions and simply start reacting based on the fear of missing the next move (either up or down). When you see traders chasing the best course of action is to stand aside so you don’t get whipped around by other market participants’ emotions…or your own. Reduce your position sizes and clearly identify the current range for the security you’re trading. Then wait for a break of the current range and sentiment to relax a bit before making big decisions.
As a side note, sentiment for gold (GLD) is showing the same type of pattern. Be aware that GLD’s sentiment tends to be more volatile. But even considering the higher volatility the latest swings in sentiment have been very large for GLD. The fact that price has been in a tight range while sentiment is moving violently highlights the nervousness and lack of confidence from traders. This is a time to be careful.