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Lack of Trade Signals Suggest Uncertainty

Over the past few weeks I’ve highlighted some things that suggest the market is in a trading range between 1800 and 1850 on the S&P 500 Index (SPX).  Another thing I’m seeing that indicates uncertainty is the lack of trade signals generated from the Twitter stream.  During the early months of 2013 as the market was coming out of a choppy period there were a lot of long signals generated (green vertical lines on the chart below).  As the market started to turn over in May several short signals were generated (red lines).

Trade Signals from the Twitter Stream

Throughout most of the year the pattern of buy signals as the market rallied out of lows and sell signals at the beginning of declines continued. The dip into early February this year has broken that pattern.  There were a few sell signals as the market declined, but no buy signals on the subsequent rally.  When I look at individual charts I see sentiment confirming the price decline as a stock consolidates.  Bank of America (BAC) and Yahoo (YHOO) are good examples that are being repeated in a lot of stocks.  This suggests that the market needs a bit more time to digest the gains from 2013 before it can move higher.  I suspect we’ll start to see some positive divergences and an increase in buy signals when the current sideways movement ends.

One explanation for the lack of buy signals could be a rotation to less known stocks.  I track the 70 most active stocks on Twitter looking for trade signals so my observations reflect the stocks that are talked about (tweeted) the most.  These stocks tend to have higher market caps.  Over the past few weeks I’ve started seeing a variety of new stocks in the weekly most bullish list instead of the the most tweeted stocks rotating in and out.  This suggests that traders and investors are looking for new opportunities rather than wanting to push the best known stocks higher.

Bottom line, uncertainty abounds and market participants will need a reason to buy the highs.

 

 
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2 Responses

  1. Grant

    Since the theory is to fade sentiment at extremes, do you think the same thing will happen with the “twitter stream?” Or is maybe twitter used more by trading pros/smart money than other demographics or are you able to identify and monitor only the trading pros? While we may not have had a significant top or bottom since you began, can you tell anything from the minor tops and bottoms since you began monitoring the twitter stream?

    • Blair

      What I’ve found is that the trend of sentiment is the best indicator of a stock’s direction (or the market). By using Twitter and StockTwits as the source of information for the indicator the system can combine long term investor’s opinions with short term traders. Also different forms of technical analysis ranging from simple trend following to Elliott wave can be considered. The underlying theory is that Twitter provides a large enough sample set that it has some predictive value for the market.

      On identifying market tops and bottoms you’re correct that we haven’t had too many good turns because they’ve been so small. 2013 was a year when the market went straight up. 2012 was a better year for the indicator because the swings were larger. Here’s a post with a 2012 chart.

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