Mixed Signals

By | September 6, 2014

Our social media momentum indicators for the S&P 500 Index (SPX) are giving mixed signals this week. The core momentum indicators are still warning that some caution would be prudent. They reached extremely over bought levels two weeks ago which caused us to warn that the market would likely consolidate gains near the 2000 area before pushing higher. Two weeks later SPX has broken above 2000, but the momentum indicators from both Twitter and StockTwits have only fallen to a level that has historically marked short term tops. In the past this condition resulted in a few weeks of sideways action that ultimately led to lower prices. We’ve had a few weeks of sideways action so a decline next week wouldn’t be surprising.

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Breadth from social media has turned down as the market pushes higher. On Twitter the number of bullish stocks has fallen and the number bearish stocks has risen. The traders on StockTwits are finding more stocks to support, but they are also bearish on a larger number. Our algorithm on StockTwits only captures data on larger and more well known names so the increase of both bullish and bearish stocks could suggest a rotation to safety. Nevertheless, both indicators are turning down which warns that the market is getting thinner at new highs.

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Support and resistance levels are showing positive signs, but with some danger attached. Almost all of the price targets in tweets this week were above the market with 2000 on SPX the line in the sand for both bulls and bears. The bulls are tweeting 2020 and 2050 in large numbers making them resistance. Below the market there is virtually no support levels being tweeted other than the recent lows in the 1990 area. This adds some instability because traders aren’t tweeting levels they’d buy on a dip below recent lows. Even with the lack of support levels this indicator suggests the market should move higher.

Sector strength is mixed with a positive slant. Consumer staples which are defensive aren’t garnering support, but the other defensive sectors of utilities and health care are. The leading sectors of basic materials and technology have strong support and indicate the market should move higher.

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Overall momentum from social media is suggesting the market wants to move higher, but may be held back by thinning breadth and a need for more consolidation to work off overbought conditions. When the market gives mixed signals the best we can do is watch price. Any move higher should quickly reach 2020 on SPX. A break below recent lows near 1990 will most likely be associated with an uncomfortable decline.

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