Monthly Archives: July 2015

Character of the Market

One of the most beneficial uses of the daily most bullish and bearish lists is to get a feel for the character of the market. This is especially true when the market is making a short term bottom or top. Yesterday the market rallied sharply out of a one week decline. By looking at the stocks that had the strongest support on the Twitter stream yesterday you can see that the rally was fueled by beaten down stocks. This tells us that short covering and/or value buying was taking place. In a healthy market this list should have been filled with leading stocks (not beaten down stocks) as people add to their winners coming out of a dip. This puts yesterday’s rally in doubt.

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So where were the leaders? Take a look at the most bearish list for yesterday. Lots of leaders. This indicates that people are selling their winners into this rally. Another problem for the current rally. Unless this trend changes I’ll be suspicious of further gains by the indexes.

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Another way to judge the damage done by a short term dip is to view the list that aligns with the duration of the decline. The current decline was about a week. Here’s the most bearish list over the past week. Again, too many leaders for my comfort. You can see the most bullish stocks on Twitter here. Use the “frequency” links (1 Day, 1 Week, etc.) to see different time frames. The bearish list is located here.

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The Bear is Stirring

Earlier in the month I wrote that people on Twitter finance were turning from bullish to neutral. Now I’m starting to see a rise in bearish sentiment the likes of which we haven’t seen since late 2012. The most prominent sign comes from breadth calculated between the most bullish stocks and the most bearish stocks on the Twitter stream. The number of bearish stocks is rising rapidly and is now at the highest level in nearly three years. This is a sign that investors are starting to show concern for their losing positions and traders are shorting weak stocks. The rise in bearish stocks has caused breadth from Twitter to fall below the January and October lows.

This is an unusual condition with the market so close to all time highs. There are more people who own stocks than those who short stocks which gives a natural upward bias to the aggregate number of bullish tweets. As a result, we shouldn’t see a large number of bearish stocks until market participants sour on their own positions. The fact that the bearish list is growing rapidly indicates a lot of damage is occurring in individual stocks. Not something we want to see near all time highs in the S&P 500 Index (SPX).

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Drilling down to the list of bearish stocks over the past month you can see there are a lot of material and industrial stocks. But, there is a rising number of stocks in industries ranging from home furnishings to aerospace. As the bearishness engulfs more industries it will place a drag on the general market so keep an eye on this list. You can see the full list which is updated daily here.

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The sentiment and momentum picture for the S&P 500 Index (SPX) shows a pattern of hope and chasing followed by disillusionment. The failure to reach new highs during the June rally caused 7 day momentum to fall to its most oversold level in three years. Then it showed tepid readings during the July rally. This indicates market participants didn’t believe new highs were possible. 7 day momentum is now back below zero and daily momentum just painted an initiation thrust that usually means a few more days of selling.

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Price targets gleaned from Twitter for SPX show that traders were caught off guard when the market fell last week. Most of the tweets were for slightly higher prices, but as the week progressed the price targets followed the market down. One interesting thing is that there is no evidence of fear yet. Usually, a steep two day decline will bring out tweets for lower levels. Support and resistance levels remain pretty much the same with the exception of 2100 on SPX changing back to resistance. Major support is 2040 on SPX and major resistance is 2140. Not surprising given the fact that it’s the most recent trading range.

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Sector sentiment is showing the most strength in the defensive sector of consumer staples. However, with financials, consumer discretionary, and technology still positive the picture is mixed.

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Conclusion

The bear is starting to stir. The list of bearish stocks over every time frame is growing, breadth from Twitter is worse than the January and October 2014 lows, and 7 day momentum showed a weak response to the recent rally. The Twitter stream is still neutral on the market, but a dip in 7 day momentum below the last low will be a warning that the bulls are turning to bears.

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Count of Bearish Stocks Rising

The number of bearish stocks on Twitter are approaching the level recorded at the January lows for the S&P 500 Index (SPX). They’re now above their readings of last October. This is unusual given SPX is near all time highs so it’s something you’ll want to track carefully over the next few weeks. If the bearish stocks continue to rise it will warn of rising risk in the market. If Twitter Breadth falls below zero it will signal a change from bullish to bearish over the long term. You can see the current chart here. Here are some other things I’m watching that indicate weak stocks are being sold en masse.

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Lack of Optimism

The rally for the S&P 500 Index (SPX) that started in earnest on July 10th isn’t inspiring traders on Twitter. The daily sentiment reading on the 10th was a healthy +20, but since that time the readings have been at moderate levels in the low teens. 7 Day momentum has turned up from an oversold level, but the tepid daily readings have kept 7 day sentiment well away from becoming overbought. Overall it paints a picture of market participants waiting for a reason to get bullish.

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Price targets from traders on Twitter are lacking optimism as well. Almost no one is calling for higher prices.

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Breadth calculated between bullish and bearish stocks is currently falling due to the number of bearish stocks rising. If the trend continues it will be a warning that market participants are becoming bearish.

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Sector sentiment is mixed. Defensive sectors are showing strength along with most of the leading sectors.

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Conclusion

Market participants aren’t too excited about higher prices. They seem to be waiting for a reason to get bullish.

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From Bullish to Neutral

I’m starting to see signs that market participants on Twitter are turning from bullish to neutral. This is the first sign of longer term weakness from the Twitter stream that I’ve seen since mid to late 2012. Before the strong rally that started in late 2012 it was common for 7 day momentum to stay below zero for extended periods of time as traders were accustom to periodic corrections. The lack of a decline greater than 10% in since then has kept 7 day momentum mostly above zero with a few small dips that quickly reverse higher. It seems that we’ve all been conditioned to buy the dip.

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The weakness over the past two  weeks in the S&P 500 Index (SPX) has caused 7 day momentum and sentiment to dip to the lowest level in nearly three years. It appears that the combination of Greece and China is having an impact on longer term sentiment. I’m not seeing outright bearishness yet, but it does appear that there is a shift from bullishness to neutral on Twitter finance.

Breadth between the most bullish stocks and the most bearish stocks is showing signs neutrality as well. Over the past several weeks the number of bullish stocks has been declining, but the number of bearish stocks isn’t rising rapidly. This indicates that investors are getting cautious by taking profit from their winners, but not getting extremely bearish about their losers. The lack of bearish stocks is keeping breadth above both the January and October lows.

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As I mentioned at Downside Hedge, half the stocks in the S&P 500 index are below their 200 day moving average. This condition causes risk to rise, but probably won’t cause a steep sell off unless investors get more bearish about their losers. Many stocks are suffering decent sized corrections, but people aren’t tweeting their angst in large volume for the stocks they own. You can keep track of the number of bearish stocks with this interactive chart.

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Another sign that market participants aren’t outright bearish is the number of stocks in the two month bearish list. The market has been declining for two months now, but the number of bearish stocks is still extremely small. It has a total of two. You can see the most bearish stocks over several time frames here.

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Sector sentiment is showing some short term weakness with the defensive sectors still in positive territory.

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Support and resistance levels for SPX have a fairly solid line in the sand at 2040. If that level breaks then the 2020 to 2025 area could provide minor support. Above the market the bulls are hoping for a move above 2100 or 2110, but not in large numbers. Price level tweets give an overall picture of most everyone hoping 2040 doesn’t fail.

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Conclusion

I’m seeing early signs of market participants turning from bullish to neutral. This makes the next rally very important. If it fails to reach new highs it could bring out the bears in force. The fact(s) that 7 day momentum for SPX reached three year oversold levels with price only 4% below all time highs, but the bearish readings for individual stocks remains low indicate investors are waiting for market clues before deserting their holdings. Keep an eye on the number of bearish stocks as a sign that bearishness is setting in.

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Chasing

Traders on Twitter have been chasing every price movement and every change in the Greece situation for the past few weeks. This is causing quick moves from extremely overbought to extremely oversold readings on the 7 day momentum and sentiment indicator for the S&P 500 Index (SPX). When this occurs it creates an unstable market that could fall quickly if everyone starts running for the door. It appears that this week the market will continue to be driven by news out of Greece and the EU. Once that settles out I’ll be looking for a new trend in 7 day momentum to confirm the direction of the market.

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Support and resistance levels posted by traders on Twitter are mostly inside the current range. Below the market support comes in at 2040 for SPX. Above current prices the bulls want to see 2100 recaptured, then show resistance at the old highs near 2140.

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Sector sentiment got cautious last week with negative readings in the leading sectors and positive readings in the defensive sectors. This indicates investors are adding some defensive stocks to the portfolio.

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Breadth calculated between the most bullish and bearish stocks declined a bit this past week, but overall is still healthy.

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Conclusion

Greece is dominating traders actions and causing chasing which leads to instability. Some caution is prudent until the situation is resolved. Then we’ll be watching for a new trend in 7 day momentum.

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