Walk the Line: Looking at Price and Sentiment Near Resistance

Market sentiment flow improved this week. Using $SPY as a proxy, we saw more net Bullishness enter the community’s message flow as equities rallied and volatility continued to compress. Sentiment and price have been responding in curious ways as the S&P 500 approaches the psychologically important 2100 level.

In late September the equity markets seemed to be on the verge of a serious break. The $VIX was rising towards 30 and sentiment flow was at an extreme to the downside in broad ETF’s like $SPY. As prices stepped back from the brink, however, initially sentiment flow turned less negative. This probably reflected the easing of fears that a catastrophic break would occur. The fact that sentiment maintained a Bearish bias might reflect a collective disbelief in the recovery.

Then again, these price-sentiment dynamics might be more about greed than fear. After a sustained Bull rally, the temptation to make a killing by timing the top is compelling. For people who can correctly call the top, the payout is usually asymmetric (much higher upside than downside). This viewpoint is bolstered by the fact that the last two weeks saw sentiment flow turn just as negative as late September despite prices being a lot higher.

That being said, an old saying in market making is it’s “damn near impossible to sell the top without selling a lot of [redacted]ing awful prices in between.” It’s a market maker’s job to sell even as prices tick higher. Everyone else has to be a bit more exact in their timing. The market’s price action over the last 30 days illustrates the difficulty in predicting turning points. It also showed there can be value in taking the contrarian viewpoint when message flow is at an extreme.

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This week the Sentiment Stock Screener caught another big haul of stocks trending in both price and sentiment. The screener scans thousands of stocks and creates 5 groups of symbols which are worth watching in the week ahead:

Group RR: Rising Sentiment + Rising Price

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

RR

This week the $VIX continued to fall, starting the week at 20 and falling steadily to the 15 handle by the close of trading on Friday. Last week’s screener had $TVIX leading Group RR. Similarly this week has $XIV experiencing both rising sentiment and price: 22% of message flow expressed Bullish sentiment versus only 3% to the downside. The volatility ETN rallied 11% on the week as the $VIX fell around 23%.

Sentiment surged in Nike ($NKE) as prices crept back towards all time highs: 1 out of 5 messages expressed a Bullish sentiment with negligible Bearish activity. The stock has seen its share price more than treble since 2011 and the community is currently anticipating a continuation of the trend.

 

Group RF: Rising Sentiment + Falling Price

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

RF

Shares in US Steel ($X) continued to fall this week, dropping 11% and bringing the total yearly decline to over 75%. The community is expressing the contrarian viewpoint, however, as 21% of message volume was Bullish. This produced a strongly Bullish net sentiment score as the Bears were only 4% of message volume.

 

Group FR: Falling Sentiment + Rising Price:

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

FR

Shares leapt 22% in clothing retailer Ambercrombie & Fitch ($ANF) after their latest earnings report hit the wires Friday. The community was unimpressed despite the rally as the stock’s message stream had a negative sentiment imbalance: 13% of messages were Bearish against 6% on the upside. This rally erases some of $ANF’s losses on the year: YTD the stock is down only 15%.

One of the most lop-sided sentiment pictures this week came from Gap ($GPS) which had 17% Bearish message flow against a paltry 1% on the Bullish side. The stock rallied 7% on the week but is down over 30% on the year.

 

Group FF: Falling Sentiment + Falling Price

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

FF

Sentiment flow turned Bearish in apparel retailer Urban Outfitters ($URBN) after their earnings release on Monday. The share price fell 6% continuing the trend downward it began in March. $URBN has fallen around 25% YTD.

 

Group POLAR: Sentiment Divergence

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

POLAR

Shares in Conoco-Philips ($COP) and Chevron ($CVX) traded sideways this week, but that belied a polarized sentiment picture underneath that placid surface. In $COP’s case the flow was particularly divergent, seeing a +/-16 sentiment flow for the week. This can be a sign of uncertainty towards the future price trajectory which can initially result in stable, sideways price action. It’s a volatile situation in disguise, however, as soon as the dynamic shifts predominantly to one side a move can happen quickly.

– 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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