On Friday, breadth calculated between the most bullish and most bearish stocks on Twitter crossed back above the zero line. The recent rally brought with it strong bullish readings in enough stocks to overwhelm the bearish stocks. This is a constructive sign… maybe. I’m hedging because I suspect the indicator has a bullish bias.
The breadth indicator is built on top of our bullish and bearish algorithm that reads the Twitter stream for about 650 stocks. It is in part a sentiment indicator because many market participants tweet opinion about the future direction of stocks. The algorithm also captures action (buying, selling, hedging), fundamental analysis, and technical analysis… which is often influenced by “opinion”. Unfortunately, we humans tend to let emotion cloud the facts. Fortunately for our everyday lives, we’re an optimistic species. Unfortunately, that is where the problem for the breadth indicator lies. We are more likely to buy stocks than sell them short. We are more likely to tweet about stocks that we own that are going up, than stocks that we own that are going down. We are more likely to tweet technical analysis indicators that align with our opinion… which for most of us is optimistic. For those reasons (and many more) I suspect that the breadth indicator has an inherent bullish bias. As a result, I’m guessing the bear trigger and the bull trigger might lie at different levels (more on that below).
The breadth indicator has proven its worth over its three years of history by not turning negative until 1/19/16. The signal coincided with several other intermediate and long term indicators that I follow — it’s always good to see a new indicator be confirmed by older, more proven indicators. Here are some examples of their bearish signals.
On 8/31/15, monthly MACD for the S&P 500 Index (SPX) clearly broke its uptrend. Monthly Momentum looks like it will close this month with a clear bearish signal.
Weekly MACD and RSI for SPX started showing clear bearish signs in January by turning down from near 50 and zero respectively.
Dow Theory signaled a bear market on 2/11/16.
So taken all together, our breadth indicator’s bear market signal is safely nestled between several other indicators that are calling for a long term bear market. Unfortunately, it has now moved back above zero without any confirmation from the other indicators. This could be because it is a vastly superior indicator… but I doubt it. 😉 As I mentioned above, I suspect the indicator has a bullish bias, which would result in whipsaws during bear markets if you use the zero line to signal a bull market. We’ll have to collect more data before I can make an “official” call, but I’m guessing that the way to use the indicator will be to start selling rallies when breadth dips below zero, but use a trigger of +20 or +25 to start buying dips.
Another sign that we’ve entered a bear market comes from the daily momentum and sentiment readings generated from Twitter for SPX. Notice that it is spending many more days below zero than above. Add to that the bullish readings are generally lower than they were before July of 2015 and it paints a negative picture. Another concerning sign for the near future is that 7 day momentum has flat-lined below zero. If it rolls over, we should expect another trip back to the recent lows.
Support and resistance gleaned from Twitter is starting to show some scattered hope, with a strong level of support between 1800 and 1810 for SPX. Each day that passes with traders still tweeting those levels makes it more critical support. There is a small cluster of resistance building at 2000 on SPX, but for the most part traders are showing their uncertainty by tweeting price after it’s been achieved. Bulls want to see the market hold 1940.
Sector sentiment is showing all sectors but one as positive. When every sector is positive it almost always marks a short term top so we may be getting close.
Breadth is back above zero, but I’m guessing the signal is premature. Other technical analysis indicators aren’t confirming, and neither is 7 day momentum. We’re still likely in a bear market, so a failure of 7 day moment from here should carry price back to recent lows… at the least.