Hello Market, My Old Friend… They’ve Come to Liquidate Again: Sentiment and Volatility

This week we waved good-bye to earnings season and said “hello” again to the market’s old nemesis, volatility. US equities led the way down along with European stocks as sentiment flow turned extremely negative in the broader indices, especially the $SPY (see chart below). While this week’s rally in the $VIX (to 20) pales in comparison to August’s spike (above 50), the StockTwits community remained extremely skeptical about the health of the market as a whole. It would seem that the divergence in sentiment flow seen in the past is partially correcting itself as individual symbols begin to follow the negative trend that $SPY has set in sentiment flow.


Group RR: Rising Sentiment + Rising Price

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


With the rally in the $VIX, interest naturally turned to Exchange Traded Note (ETN) products like $TVIX which are linked to the volatility index via the VIX futures curve. Shares in $TVIX rallied 44% against a 40% rally in the $VIX itself. This might seem counter-intuitive. Given the fund’s name “Daily 2x VIX Short-Term ETN” how can it only be up 4% more than the $VIX on the week?

The answer lies in the fact that the $TVIX doesn’t invest in the $VIX, but rather in the VIX futures curve. You see, you can’t really trade the $VIX directly: its a mathematical formula with a ton of exponentials, thus making it “non-linear.” To trade the $VIX directly you would have to maintain options positions in every strike for all 500 companies in the $SPX at the same time. Oh, and remember the non-linearity? That means you would have to constantly rebalance all your positions as prices moved around. Have fun with that.

That kind of flawless execution isn’t exactly feasible or cost effective, even for the most sophisticated market players. So the industry realized there was a demand for an alternative and created the VIX futures market, which acts like any other futures market where traders can make bets on what they think the $VIX will be in the future. What’s important to remember is that the $VIX is NOT the futures market. They can have very different prices, thus the return of $TVIX can diverge wildly from what you might expect from just watching the $VIX by itself. This dynamic holds true for pretty much every volatility ETN like $UVXY or $VXX, for example. Most of these notes just boil down to being long (or short) a boatload of front-end VIX futures contracts.


Group RF: Rising Sentiment + Falling Price

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


J.C. Penny ($JCP) released its latest quarterly earnings report on Friday, sending the stock price lower immediately. This decline in price was balanced against a rising tide of Bullish Sentiment (see the bottom of first chart for a 10-minute picture). 1 out of 5 messages in $JCP’s home stream were Bullish vs only 7% on the Bear side.

Shares in Canadian Solar ($CSIQ) also fell after the company released earnings on Tuesday. Much like $JCP, however, this decline was met with a notable spike in Bullish sentiment flow. As the stock fell back towards its lows on Friday, sentiment briefly dipped negative suggesting slight caution headed into the weekend.


Group FR: Falling Sentiment + Rising Price:

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


Two ultrashort ETF’s were notable inclusion in Group FR this week as sentiment in both $SQQQ and $BIS turned negative in the face of price increases. Both of these ETF’s are levered shorts. In $SQQQ’s case it tracks the Nasdaq 100 ($QQQ) and $BIS tracks NASDAQ Biotechnology Index ($IBB). In this case, when the community says it is Bearish on $SQQQ it is Bullish on $QQQ, so it may be that some members are using these two ultrashorts as vehicles for betting on a rally in stock prices.


Group FF: Falling Sentiment + Falling Price

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


Long term investors Fossil Group ($FOSL), a consumer fashion accessories firm, are surely used to being abused by now: from the beginning of the year to Tuesday, shares in $FOSL fell by over 50%. Moreover it was a consistent, grinding, full-court-press kind of decline that never let up. Everyone has been caught in these kinds of moves, myself included (although not in this particular example). Anytime I’ve ever bought a slowly sinking (or rising) boat like this I’ve been taught a lesson in why you don’t arrive early to the party in the stock market: usually the big whammy is waiting around the corner and that’s where the truly patient money waits to enter.  This week’s 41% decline was a brutal reminder of why its important to wait for capitulation moves if you are trying to buy the bottom or sell the top of any given move. Calling turning points is a hard game, even for professionals. In market making the old saying was “you have a buy a lot of [expletive deleted] before you can buy the bottom, and always remember the market can remain wrong longer than you can remain solvent“.

Retailing company Nordstroms ($JWN) also released its earnings report this week with similar, albeit less severe, results to $FOSL. The stock price fell immediately following the release on late Thursday. The event prompted a significant negative reaction from the community, with Bearish sentiment flow spiking shortly after the headline numbers hit the wires.


Group POLAR: Sentiment Divergence

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


QSR Shake Shack ($SHAK) was back on the radar this week after releasing earnings last Thursday. While the stock initially rallied, the move quickly reversed itself and headed in the opposite direction. The community is divided as to whether future price action will be up or down, with an even split between Bullish and Bearish sentiment flow of +/- 16%.


– 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 his website for more data and analysis.


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