Two Examples of Sector Sentiment Analysis
The bullish setup in Materials and bearish setup in Technology
In the last Thrasher Analytics Substack post, I shared the sentiment groups by Offense and Defense sectors. Below are the two examples of the individual sector sentiment charts shared in each week’s Thrasher Analytics letter to subscribers.
There’s a lot going on here, so let’s unpack it. In the top panel is the absolute price trend as well as the ratio of sector to the S&P 500 to show relative performance of the sector as well. In the second panel we have a proprietary indicator that monitors bullish momentum divergences, counting the number that setup up at any given time. Then we get to the sentiment data for the sector, another proprietary indicator that takes into account both price and volume data to calculates the daily sentiment for the broad sector. Fourth, the average sentiment score of the stocks within the sector. By looking at the average sentiment of individual securities, we can see if there’s a different trend or confirmation of a trend in sentiment for the broad sector. Finally, we have a running total over a specific lookback period of breadth thrusts for the sector. Similar to what’s commonly done for the broad market, but on a sector level.
Now turning to two examples. First up is the Materials sector (XLB). The green arrows show bullish signals based on bullish divergences in sentiment and price, when sentiment is rising during times that price is declining. The most recent signal doing a great job at marking the low in XLB earlier this year. We can see that both sector and individual stock sentiment have steadily been increasing and it’s important to recognize that sentiment making higher lows even when XLB was underperforming the Index which quickly changed as XLB has been a market leader over the last several weeks.
Next, we have a bearish example of using sector sentiment, with the Technology sector (XLK). Again, we can see a few green bullish signals the most recent marking the low in XLK in Q4 last year following the multi-month pullback that then got some confirmation by 6 breadth thrusts towards the end of the year. But let’s focus on what sector sentiment did as we moved into 2024. We began seeing lower highs, creating a divergence with price. At the same time, individual stock sentiment got to excessive optimism levels (red line). Excessive optimism can be a good thing when the sector is doing poorly, like back in late 2022 - see how XLK was near its lows by individual stocks were seeing high levels of sentiment? Turn to today and we have excessive optimism but with price near 52-week highs and a divergence in broad sector sentiment. We can now see that this ultimately led to a breakdown in relative performance for XLK in Q1 ‘24 with the ratio of XLK vs. SPX peaking and moving lower.
These charts, along with the other 9 S&P sectors are shared each week in the Thrasher Analytics letter, providing a unique insight into the primary sectors with tools not available outside of Thrasher Analytics.
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