Since the first of April it appears that traders are simply chasing price. When smoothed Twitter sentiment paints a similar pattern to price it shows that traders are reacting to price rather than relying on other technical indicators to make trades. Another sign of traders chasing is very wide swings in daily sentiment that follow price. This is somewhat expected when price breaks important support and resistance levels, but isn’t common when price is between major support and resistance points. The break above 1575 on the S&P 500 Index (SPX) painted a positive initiation thrust in daily sentiment. The fall back below 1575 this morning brought a negative initiation thrust. This action in sentiment could simply reflect the move back through that level, but it since it’s occurring with smoothed sentiment mirroring price there is also the possibility it may signal chasing. When traders chase price it causes volatile swings and creates instability. This is a time to be cautious.
Twitter sentiment for SPX cleared it’s consolidation warning last week and is now showing some indecision. Smoothed sentiment is still above zero and also above its confirming uptrend line. However, the opposite initiation thrusts that came almost back to back aren’t an encouraging sign. Before we can call another consolidation warning we’ll need to see smoothed sentiment fall below its confirming up trend line. That probably gives the market a few more days to sort itself out.
One thing to note is that if we get another consolidation warning it will be similar to what happened to Google (GOOG) during the first part of March. We posted its first warning on March 6th. That warning was cleared, then we got another one on March 13th. Google was making a short term top and sentiment was picking it up, but got whip sawed. The next few days may provide whip saw warnings in SPX. The pattern for GOOG is a bit cleaner because smoothed sentiment continued to diverge sharply with price as the stock moved higher. Smoothed sentiment for SPX is still diverging from price, but the slope isn’t as steep….so for now we’re watching and waiting.
From a sentiment perspective the thing that concerns us most is market participants starting to get concerned about deflation. If people start to believe that deflation (and a recession) is in the future then stocks won’t perform well. Searches on Google for “deflation” have picked up lately. This is a trend you’ll want to keep an eye on.