Market Sentiment at the Edge of a Falling Knife

Getting to work with the StockTwits dataset has given me a deep appreciation of how sentiment can be valuable as both a Stock Screener and a determinant of short-term market dynamics. As such, I always like to look at the sentiment charts on each symbol’s StockTwits message stream. You can view them for yourselves in every symbol’s stream by selecting the Sentiment chart. Even something as simple as message volume can be valuable in predicting volatility.

These graphs offer a glimpse into the river of opinion that courses through the StockTwits platform, distilling hundreds, sometimes thousands of messages into a few powerful visualizations. Like every great technological advance, the development of these new financial tools comes with a corresponding increase in our responsibility to wield them with skill.

As such, it is important to remember that the messages on StockTwits represent a flow of information. Likewise, when people refer to sentiment they are really talking about sentiment flow. This represents the collective wisdom of the community as it digests the combined movement of prices and fundamental factors.

As last week’s post laid bare, once a stock is caught by the screener it has a pronounced tendency to stick around. By construction, this means this series of Stock Screeners has consistently captured stocks which are in-play for a persistent period of time. Indeed, this effect can last for days:

Screen Shot 2015-10-03 at 12.44.20 PM

This was the single most fruitful screener since it started, producing a huge haul of stocks to watch for the coming week. The stock market experienced a strong rally into the close of the week; those who chose to catch a falling knife were rewarded with a knee-jerk rally. The velocity of the surge suggests a significant amount of short covering may have been involved.

Group POLAR: Sentiment Divergence

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

One of the most bi-polar sentiment pictures came from investors and traders in drugstore chain Rite Aid ($RAD), with +/- 20% of messages expressing Bullish/Bearish sentiment. In other words, if we look at the 302 messages the StockTwits community shared about $RAD, 60 were Bullish and 60 were Bearish, an even split. Like many stocks of late, Rite Aid has seen its share price fall by around 1/3 since August as investors have raced for cash. The rate of sentiment flow has deteriorated in lockstep with the price.

Biotechs continued to be in the crosshairs this week, with group POLAR capturing a pile of names including iShare’s Nasdaq Biotechnology ETF ($IBB), Amicus Therapeutics ($FOLD), as well as perpetual member of this screener Heron Therapeutics ($HRTX). The community expressed a divided vision for the future of these names with large quantities of evenly balanced Bullish and Bearish sentiment flow.

Similarly, investors are split on the future of  Esperion Therapeutics ($ESPR), with +/- 18% sentiment flow this week (i.e. almost 1 in 5 messages were Bullish against the same on the Bearish side). The stock fell 32% on the week and has lost around 70% of its value over the last three months. The share price reached its all time high of $115 / share in May of 2015 and has been on a slide ever since.



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 regional air-carrier Republic Airways ($RJET) more than doubled this week after the company reached a tentative agreement with its pilots union, temporarily easing concerns that the company was headed towards financial distress. The community agreed, with nearly half of sentiment flow on the Bullish side.

Sentiment flow surged towards the upside this week in solar panel manufacturer Solar City, with 33% of net message flow expressing Bullish sentiment. The stock rallied 12% this week after bouncing hard off the $40 / share support level.



Group RF: Rising Sentiment + Falling Price

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

Group RF was led by ocular prosthetic manufacturer Second Sight Medical Products ($EYES) which saw its share price decline by nearly 30% in the face of strongly Bullish sentiment flow. The community is betting on a turnaround of sorts: the stock has lost nearly 50% since August.

This list was chock-full of biotech names this week as the group as a whole experienced a bout of bottom fishing, with broad price declines matched by increases in Bullish sentiment.



Group FR: Falling Sentiment + Rising Price:

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

Pacific Biosciences ($PACB) leads this contrarian group of stocks, gaining 53% on the week against a backdrop of declining sentiment. The community chose to fade the price action, with 28% of message volume expressing Bearish sentiment. To put it in perspective, there were 122 more Bearish than Bullish messages in $PACB’s stream.

Refiners got a much needed bump this week with names like Marathon Oil ($MRO), Apache ($APA), Hess ($HES) , and Valero Energy ($VLO) seeing their share prices surge higher towards the end of the week. Sentiment was slower to adjust, however, with increasing Bearish message flow in each name despite increases in prices across the sector.



Group FF: Falling Sentiment + Falling Price

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

The price of cyber security firm Barracuda Networks ($CUDA) fell 29% this week after reporting disappointing earnings on Wednesday. The price decline was accelerated by a declining sentiment picture: 1 of 5 messages expressed a Bearish view against 1 in 20 on the Bull side.

Investors turned negative in 3D printing firm Stratasys ($SSYS) this week, with 18% of sentiment flow on the downside. The sector has been in a rough patch as of late: $SSYS has steadily lost value along with competitor 3D Systems ($DDD) since reaching a peak in early 2014. Much of the hype surrounding 3D printing has faded as new entrants have sprung up, many tapping new capital sources via crowdfunding.



– 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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