From Bullish to Neutral

By | July 12, 2015

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.

150712spx

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.

150712breadth

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.

150710spx200

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.

150712bearish2month

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

150712sectors

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.

150712spxSR

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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