Monthly Archives: June 2016

Oops!

Everything was looking so good with sentiment in the market, then Brexit struck. Oops! When events come out of nowhere, it is a good time to step back and watch for a few days (or weeks) while the market adjusts to the new information… because the information we previously had has been invalidated. As a result, I don’t have much to say this week about sentiment since the past few weeks of sentiment have likely been invalidated as well. Below are a few things from Friday’s sentiment that hold a clue or two.

The most significant is that tweets with price targets well below the market have returned. Traders and investors are now fearful that 1800 on the S&P 500 Index (SPX) will be revisited.

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One mildly hopeful sign is that daily sentiment for SPX on Friday was fairly muted, printing only a -2. I doubt that will be the case on Monday. I expect to see a lot of fear and uncertainty show up in sentiment after reading the weekend’s headlines. If I’m wrong and daily sentiment doesn’t turn down sharply, it will be a very encouraging sign.

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Breadth has been improving, but I expect to see it fall if the market falls. It will be the slope of the decline that I’ll be watching.

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Conclusion

We don’t have much information to work with so we’ll have to see what the next few days bring.

SIDE NOTE: On June, 17th I wrote at Downside Hedge that market risk was rising. Then on Friday, we got a market risk warning that changed all portfolios to an aggressively hedged or cash position. You can see more about hedging when market risk is high here.

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Encouraging Signs

Although¬†Twitter sector sentiment predicted a short term top in the market last week, there are some encouraging signs popping up this week. First is breadth between the most bullish and bearish stocks on the Twitter stream. It is finally showing some positive momentum. The number of bullish stocks started to increase as soon as the S&P 500 index (SPX) broke above 2100. The cross back below 2100 on SPX didn’t do a lot of damage to the bullish list. The number of bearish stocks is falling as traders finally abandon short positions.

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The next positive sign come from price target tweets. Traders are once again calling for new all time highs. While at the same time we’re seeing tweets for support in the 2075-2080 area on SPX. This chart tells us there is more hope than fear.

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7 day momentum and sentiment from Twitter for SPX is pushing up against a level that has marked tops starting in July 2015. If we’re in a bear market I’d expect to see this indicator deteriorate rapidly. A small dip that recovers and breaks above the “bear market” overbought level would be very bullish and should result in new all time highs.

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Sector sentiment was mostly positive this week. As I mentioned before, I’d like to see some weakness in the defensive stocks as a sign investors are preparing for a rally rather than protecting their portfolios.

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Conclusion

We’re seeing positive signs from breadth and price target tweets, but 7 day momentum is at a “bear market” overbought level. If momentum can move above that level then we’ll probably see new all time highs in SPX.

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Everyone is Waiting, But…

I’m seeing strong signs from the Twitter stream this week that everyone is simply waiting for something to happen. But sector sentiment is showing an overbought condition with every sector printing positive sentiment readings. Almost every time this happens it marks a short term top. The few times this indicator has failed, the market rallied one more week which again had all sectors positive, then the short term top was put in place. As a result, I don’t expect much upside until this condition clears. For a bullish resolution, I’d like to see some negative readings in the defensive sectors (consumer staples, utilities, and to some extent health care) as the market dips.

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The first sign I’m seeing of waiting comes from breadth between bullish and bearish stocks. It is drifting slightly higher, but not for a great reason. It appears that the bears are giving up on their shorts, but the bulls aren’t buying with enthusiasm. The bulls are waiting for a break to new highs before committing more to this rally.

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Next we have 7 day momentum and sentiment still drifting sideways, albeit in a larger range. The lack of trend, either up or down, adds to the argument that market participants are waiting for something to happen before they take action. Two weeks ago 7 day momentum painted a triangle patter that usually points to a good move in price when it breaks, but this time it didn’t happen. This indicates sentiment is following price, rather than leading.

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Add to that the price target tweets. They are all coming at or very near current prices. Almost no one is tweeting any speculative price targets. This means people are observing rather than taking action based on hope or fear.

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Conclusion

Everyone is waiting for something to happen, but we’ve got a sign that a short term top is near. We’ll have to see if a dip causes people to act.

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