This past week saw the S&P 500 Index breaking out to new all time closing highs. All time intra-day highs are just a few points away just above 1576. However, our core market health indicators continue to deteriorate. These aren’t the type of internals we like to see near market tops. Our indicators are telling us that market participants are getting cautious…which makes us cautious too.
Our Twitter sentiment indicator for the S&P 500 Index (SPX) is starting to show some strength but without much enthusiasm. Although daily sentiment is painting higher lows and has a good uptrend line it isn’t acting like it should when price breaks out to new highs. Thursday’s move came with a higher intensity of tweets (volume and scores), but the aggregated score for the day was only +10.
The move above 1530 on SPX at the first of March is more characteristic of confirmation of a break to new highs. It came with a print of +21 on the day of the break out signaling that market participants were heralding the move. This is in contrast to yesterday’s break out where many traders on Twitter were skeptical. Traders may be saving their belief in the rally for the all time intra-day highs just above at 1576. We’ll be watching for confirmation if a breakout occurs next week. We’ll post updates of sentiment on Twitter @DownsideHedge when price gets near the all time highs.
Smoothed sentiment is showing the beginnings of a confirming trend line. It has turned back up near the zero line and is now positive. This gives us more confidence that the market is continuing the uptrend and has the potential to move higher. We need to see smoothed sentiment continue to strengthen or the market could stall.
Twitter support and resistance levels widened this week. As the market dipped we saw downside calls for 1530 on SPX offering a second level of support if prices fall back through 1550. We also got renewed calls for 1600 once 1565 was surpassed. SPX is still within the trading range we mentioned last week of 1545 to 1576. We suspect any prices outside those levels will give us a good near term direction.
Twitter sector sentiment is warning of caution by market participants. The defensive sectors of Utilities, Health Care, and Consumer Staples continue to show positive sentiment, while Financials, Technology, Basic Materials, and Industrials are negative. This is not a condition we would expect to see as the market is breaking out to new all time highs. Rallies led by defensive sectors are not generally good for the market.
I usually try to keep comments about macro events out of these posts. As a market technician, I believe that the reaction of price, volume, market internals, and sentiment provide better investing guidance than events themselves. However, we’re seeing something that we believe is due to the defaults in Cyprus that you should be aware of because it could result in abnormal behavior in the markets.
Defensive sectors are leading a rally that is pushing SPX to new highs, while leading stocks are losing momentum. At the same time bonds (TLT) are rising. We believe that what started as sector rotation and defensiveness may not result in a normal correction. Instead, we may see a flow of funds out of Europe that causes not only a bond rally, but also a stock market rally that continues to be led by defensive sectors. If the market continues to push higher, keep an eye on which stocks are leading the rally.
As I mentioned above, Twitter sentiment for leading stocks is waning. Of the individual stocks we actively track, many of them are warning of a pause or change in trend. In fact, it’s the highest number we’ve seen at one time since we started tracking them. On Monday or Tuesday afternoon I’ll do a post at Downside Hedge where I break down the numbers between bullish and bearish with some example charts.
Sentiment is telling us that this market should move higher, but with the wrong sectors leading. We’re still in a range that needs to be broken before a clear direction is made. We’ll be watching how sentiment reacts to any break to confirm a direction.