Buy the Rumor, Sell the News: Sentiment During a Fed Week

“Don’t fight the Fed.”

It’s an old motto, but over the last 6 years it has been a decent investment thesis. In early 2009, the Federal Reserve began a policy of monetary stimulus which amounted to a program of asset purchases: the Fed used the power of its balance sheet to inhale trillions of dollars worth of Bonds, Mortgage Backed Securities (MBS) and other debt instruments. This technique has become known as Quantitative Easing (QE) and had the effect of lowering long term interest rates. This helped spark a strong rally in both equities and bond markets across the globe.

Earlier this year, however, the FOMC — the committee which runs the Federal Reserve system and determines the Federal Funds rate — decided to discontinue QE, thus stopping its asset purchases. At the short end of the yield curve, the Fed even hinted that the Fed Funds rate had to rise and the market has been feverishly trying to guess when this moment would finally arrive.

The market initially guessed June, but after passing through that deadline FOMC meetings have taken on even more significance than usual and this week was no different. Initially, the stock market traded on a decidedly positive note; the S&P 500 rallied all the way into the interest rate decision on Thursday afternoon.

The price move immediately following the decision to keep rates unchanged was one of relief, perhaps bordering on elation. Stocks reached their peak for the week shortly thereafter, but then reality set in. Consider this: if the economy is growing then inflation expectations should rise, prompting the Fed to raise rates. Perversely, the lack of a rate increase was interpreted as a negative signal from the FOMC: it raised the probability that the Fed doesn’t consider the market or economy healthy enough to handle a rate hike.

As one might expect, the increased volatility in the stock market has led to rich pickings for our weekly Stock Sentiment Screener as traders and investors use StockTwits to express their trading opinions to the wider market. Big price swings lead to extreme changes in sentiment as well, which makes these screens valuable tools to dissect the market.


Group RR: Rising Sentiment + Rising Price

This group filters the market for stocks which have a combination of rising price and rising Bullish sentiment.

Shares in E-commerce firm Shopify ($SHOP) soared this week after announcing a partnership with Amazon ($AMZN) to help small and medium size businesses manage their online storefronts. The stock rallied 35% against a backdrop of strongly Bullish sentiment. 31% of the messages for SHOP were Bullish as investors seem to be hoping this partnership will provide increased growth going forward.

Sentiment turned extremely positive this week for shares of wearable tech firm FitBit ($FIT), with 39% Bullish message flow against only 3% on the downside. Shares rallied to end the week up 26%.

Tetraphase Pharmaceuticals ($TTPH) first appeared in our Group POLAR screen last week after dropping 80% on poor clinical results. This week the stock regained a bit of lost ground, gaining 44% on a strongly Bullish message flow: 1 out of 2 messages expressed Bullish sentiment.

RR


Group RF: Rising Sentiment + Falling Price

This group detects stocks which are experiencing falling price and increasing Bullish sentiment.

Altisource Portfolio Solutions S.A ($ASPS), a real estate services firm based in Luxembourg, leads up this week’s Group RF list after falling 15%. This continues a slide it began nearly two years ago; $ASPS has lost over 80% from late 2013 to now. Some investors are becoming vocal contrarians, however, with almost 60% of message volume on the Bullish side. This is offset against a paltry 5% Bearish message flow.

Its interesting to note that Ocwen Financial ($OCN), a holding firm for financial services, has a lot in common with $ASPS:

  • It fell 13% this week on lop-sided, strongly Bullish sentiment
  • It has lost around 90% of its value from 2013 to now
  • The two stocks have nearly identical returns from 2011 onward

A closer look might be in order: these stocks clearly share some common risk factors and its curious that the screener caught both of these symbols right next to one another.

RF


Group FR: Falling Sentiment + Rising Price:

This group finds stocks which have risen in price in the face of falling sentiment.

This group is headed up by Trevena Inc. ($TRVN), a clinical-stage biopharmaceutical company, which saw its shares rise by 30% this week. This rally prompted a slightly negative response overall, with only 15% expressing Bullish sentiment against 18% in the Bear camp. The company is currently developing an acute pain drug and has seen its shares more than double since the end of August.

Also notable on the list was Icahn Enterprises ($IEP), headed by iconic investor Carl Icahn (pardon the wordplay). Sentiment headed south this week, with almost 1 out of 5 messages expressing Bearish sentiment. The stock has given back nearly 50% of its value since late 2013.

FR


Group FF: Falling Sentiment + Falling Price

This group screens for stocks which have a combination of falling prices and increasingly Bearish sentiment.

Diesel engine manufacturer Cummins ($CMI) fell around 4% this week. This moderate fall belies a deep shift in sentiment: 44% of message volume this week was Bearish versus only 11% on the Bullish side. The stock is close to near term lows made during the VIX spike in mid August; $CMI has fallen around 20% since May.

FF


Group POLAR: Sentiment Divergence

This group screens for stocks which have a large number of Bullish and Bearish messages occurring at the same time.

There were several stocks with extremely divided sentiment this week. The most polarized was Noble Corp. ($NE), which had 28% Bullish message flow balanced against 25% on the Bearish side. The list also includes recent IPO Planet Fitness ($PLNT); the stock’s message flow was divided between 23% Bearish message flow versus 21% Bullish sentiment.

POLAR

– For the Quants you can get access to data like this using the StockTwits API.

– Make sure you follow the author of this piece MKTSTK and visit their website for more data and analysis.


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