Rotation Amid Overbought Conditions

Over the past three weeks (since the US election) we’ve observed a major rotation from safety into leading sectors by watching the bullish and bearish lists. Take a look at the bullish stocks on Twitter over the past 3 weeks and you’ll notice financials, consumer products, retail, and energy dominating the list.

Now lets look at the list of bearish stocks on Twitter over the past 3 weeks. Notice it is filled with defensive sectors such as consumer staples, utilities, and health care. By comparing the two lists you can clearly see the rotation underway.

Over the past week our sector sentiment calculated from Twitter shows the pattern continuing. This should portend higher prices over the intermediate term, but the rotation itself will cause a bit of chop in the indexes in the short term.

Another sign that we may see some chop in the short term comes from extreme overbought readings in sentiment for the S&P 500 Index (SPX) calculated from the Twitter stream. Both the daily and 7 day readings are above “normal” bull market overbought readings. This usually provides some headwinds.

On the positive side, traders on Twitter are finally starting to call for prices above current levels. This is bullish in that hope is overcoming skepticism.

Breadth is holding steady as the number of bearish stocks on Twitter falls. This is another sign of a shift to bullishness by traders as they’re not looking to short a large number of stocks.

Conclusion

The market is rotating into leading sectors and out of defensive sectors with extreme optimism. The extreme readings in daily and 7 day momentum suggest that we may need more of a pull back to relive some pressure – but it is December — so maybe a Santa Clause rally instead.