Social buzz, market sentiment

There’s no shortage of opinion in the markets—pick any stock, commodity, or currency, and you’re likely to find plenty of advocates on either side of the bull-bear aisle.

When that’s not the case—when opinion is almost entirely positive or negative—experienced traders begin to think in contrarian terms, knowing that sentiment extremes can sometimes signal potential market turning points.

One of the best-known examples is the inverse relationship between the stock market and the Cboe Volatility Index (VIX): The higher the VIX, the more volatility options traders are anticipating for stocks—i.e., the more concerned they are that stocks will fall further. But a quick comparison of S&P 500 (SPX) and VIX charts will show that many of the most significant market lows over the past three decades have been accompanied by extreme VIX highs.

The LiveAction scans for social media sentiment represent a different aspect of this dynamic, identifying exceptionally high levels of positive or negative social chatter for stocks and ETFs. Yesterday, alt-energy company Ormat Technologies (ORA) was toward the top of the list for “bottom” stocks—those with the highest negative social buzz:

With readings ranging from -4.5 to +4.5, ORA’s “buzz score” of -3.58 was on the extremely negative end of the spectrum.

News that the company was preparing a secondary stock offering appeared to weigh on sentiment, and played out in an 11% intraday sell-off. The move dropped prices out of a short-term consolidation around the stock’s recent highs, and back below a previous breakout point—the short-term resistance level the stock jumped above on November 3 after releasing earnings:

The backstory to this price action is that, even after yesterday’s sell-off ORA was still up more than 13% for the year, and earlier this month it was higher than it had been since January 2021. So, was Thursday’s negative social sentiment evidence of a meaningful change in the market’s attitude toward the stock, or a short-term overreaction to an unwelcome piece of news?

That’s impossible to know in real time, but sentiment data should be placed in the context of other market information. For one thing, it can remain elevated for extended periods, which makes identifying true extremes—and potential contrarian signals—difficult. (In other words, sometimes “the crowd” is right.) But when used in conjunction with other tools it can highlight situations where traders and investors may be overreacting.

Market Mover Update: After jumping 24% the first two days of this week, Circor (CIR) had fallen nearly 14% from Tuesday’s high when it hit an intraday low of $24.41 on Thursday (see “Avoiding the chase”). Cytokinetics (CYTK) bucked yesterday’s market softness, posting a modest gain to remain above $40 (see “Bull spreads: Calls vs. puts”).

January WTI crude oil futures (CLF3) are on pace for their biggest down week in months after yesterday’s nearly 4% sell-off, which dropped prices to $81.19/barrel intraday—their lowest level since October 19.

Today’s numbers include (all times ET): Existing Home Sales (10 a.m.), E-Commerce Retail Sales (10 a.m.), Leading Indicators (10 a.m.).

Today’s earnings include: Buckle (BKE), Spectrum Brands (SPB), Foot Locker (FL).

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