With the advent of social media sites such as Twitter, investors now have the ability to get real time sentiment information on individual stocks and stock market indexes. The Twitter stream can be read by a computer program that scores each tweet and aggregates the scores into a daily value for each individual stock. The resulting values can be used as a technical analysis indicator in stock charts similar to a Relative Strength Index (RSI) or a Moving Average Convergence/Divergence (MACD).
Downside Hedge currently computes a Twitter Sentiment Indicator for a variety of stocks, ETFs, and indexes on a daily basis. In the chart below we compare our daily sentiment indicator of the S&P 500 Index to the AAII weekly sentiment survey.
The Downside Hedge daily sentiment indicator offers several advantages over weekly sentiment surveys similar to the work of the American Association of Individual Investors (AAII).
One of the most prominent advantages is the ability to track sentiment for individual stocks. This allows investors to compare price for the stocks they own to the current sentiment of other market participants. Sentiment can warn or reassure a stock holder at critical price points for their holdings by watching for divergences and confirmation.
Weekly sentiment surveys tend to mimic or follow price, while tracking real time tweets gives up-to-date information on where people are putting their money. Thousands of traders, individual investors, investment advisors, and money managers have Twitter accounts and use them to talk about their bias for stocks. Our Twitter sentiment indicator looks for tweets that mention chart patterns, over/under bought conditions, traders buying stock or taking profits, and predictions for the future.
Daily sentiment indicators are more likely to show divergences or confirmation at short term tops and bottoms. Weekly sentiment surveys often miss events that occur during a trading week. An example in the chart above is the consolidation of the S&P 500 Index during the week of August 13th, 2012. Daily Twitter sentiment caught a large build up of short positions and anxiety reflected by many tweets talking about a double top, taking profits, or increasing hedges. The AAII survey missed the event because it occurred during the course of the week. It also missed the quick reversal in sentiment as people tweeted about covering shorts and breaking out to new highs.
Many market prognosticators use Twitter to predict future price movements. They often tweet about prices for individual stocks and market indexes. These tweets provide the basis for calculating support and resistance levels.
On the chart of the S&P 500 Index above you can see the line of resistance at recent highs of 1422. In addition, there is a clear line of support near the 1400 level. These two levels create a narrow range that should create a substantial move if either is broken. If the index breaks above 1422 most tweets are calling for 1500 or 1550. If the index breaks significantly below the 1390 to 1400 level the market could easily fall to 1300 or 1260, as this is the support or target levels people are mentioning.
As more investment professionals, traders, and individuals use social media sites like Twitter to communicate their beliefs about stocks and indexes, the quality of sentiment indicators will increase. The shift to daily and real time sentiment will provide investors one more source of information to confirm their investment decisions.
Blair Jensen at Downside Hedge tracks Twitter sentiment and provides hedging strategies for individual investors.
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Article republished via Doug Short, Advisor Perspectives
Images: via Flickr (licence attribution)
About The Author
My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.
My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.
Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.
Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.