By  Brian D. Egger

Gauging Sentiment and Value: Social Finance Tools Help Take the Market’s Temperature by Brian D. Egger

One of the recurring challenges for value investors is the need to frame other market participants’ perceptions and sentiment about stocks. Investors must be able to frame the existing state of market expectations in order to determine if there is an opportunity to capitalize on a gap between reality and perception.

In order to assess prevailing investor sentiment, individuals have historically had to rely on brokerage firm analyst recommendations, displayed on online financial website portals, like Yahoo! Finance. In recent years, financial market participants, rather than rely on Wall Street sector experts, have increasingly turned to the “wisdom of crowds” – communities of well-informed individuals – in order to gauge how the market feels about the outlook for a security.

Investor sentiment on Stocktwits

One of the more popular “crowd-sourced” online financial communities is StockTwits. The StockTwits platform produces “streams,”or newsfeeds, of Twitter-like messages. contributed from its many community members. StockTwits (www.stocktwits.com) also generates charts of “Sentiment” and “Message Volume” pertaining to individual stocks.

The StockTwits Sentiment chart reveals “the percentage breakdown in bullish and bearish sentiment shared by StockTwits users over time … calculated on a rolling, seven-day basis.” The StockTwits Message Volume chart depicts a time series of the volume of message posts pertaining to particular stocks that have been submitted by StockTwits members.

When it comes to gauging investor sentiment, StockTwits isn’t the only game in town. MarketWatch (www.marketwatch.com), a financial news and information website published by Dow Jones (News Corp (NASDAQ:NWS)), features information supplied by Market IQ. Market IQ analyzes data from social media websites, news outlets, and blogs, including Twitter, StockTwits, LinkedIn, and Facebook.

MarketIQ analyzes these data and uses them to generate indicators of market sentiment and market “velocity.” MarketIQ’s sentiment indicator is based on the relative incidence of bullish and bearish sentiment for a stock. Its velocity metric reflects the volume of mentions of a stock.

Goto source for financial forecasts

For those interested in gauging consensus earnings expectations, Bloomberg and Thomson Reuters have long been the “goto” source for financial forecasts generated by Wall Street analysts. A New York-based fintech company, Estimize, offers an alternative solution. The company crowdsources earnings forecasts on some 900 stocks.

Estimize’s consensus forecasts, which are drawn from buyside and sell-side analysts, as well as non-professional investors, have proven more accurate than Wall Street sell-side analyst projections about 69 percent of the time. Estimize attributes the forecasting prowess of its contributor community to its members’ cognitive diversity and properly-aligned incentives.

There is some evidence that the sentiment indicators generated by StockTwits have predictive value. A 2013 research paper published by Chris Loughlin and Erik Harnisch examined how well StockTwits predicts daily stock returns.1 The authors examined 19,000 StockTwits messaged that had been originated during the first quarter of 2013. They concluded that the bull and bear indicators on StockTwits had been significant predictors of the future stock market returns of Apple, Google, and Microsoft.

Another study, published in the journal, Progress in Artificial Intelligence, found no evidence that StockTwits sentiment indicators can predict future stock returns.2 However, the article’s authors did conclude that the volume of message posts on StockTwits can help forecast future stock trading volumes.

Social Media Strategies For Investing (Adams Media, November 2014) provides an overview of these, and many other,important crowdsourcing and social media tools. These resources can help market participants inform their investing process by tracking corporate news, sharing ideas, and gaugingmarket sentiment. Readers can also follow the book’s author, Brian Egger, on Twitter at @breakingcall.

Notes

1Loughlin, Chris and Harnisch, Erik, “The Viability of StockTwits and Google Trends to Predict the Stock Market,” Spring 2013, http://stocktwits.com/research/Viability-of-StockTwits-and-Google-Trends-Loughlin_Harnisch.pdf, pp.2-5.

2Oliveira, Nuno; Cortez, Paulo; and Areal, Nelson, “On the Predictability of Stock Market Behavior Using StockTwits Sentiment and Posting Volume,” Progress in Artificial Intelligence: Lecture Notes in Computer Science, Vol. 8154, 2013, p.355.

About Brian D. Egger

Brian D. Egger is the founder and publisher of BreakingCall.com, and the author of the forthcoming book Social Media Strategies For Investing: How Twitter and Crowdsourcing Tools Can Make You a Smarter Investor (Adams Media, November 2014). He is also a contributing writer for TheStreet.com. Brian was a nationally-ranked stock analyst at Credit Suisse and BMO Capital Markets and has written extensively on a variety of investment-related topics, including the impact of social media on investing. He held four team positions, including two second-place rankings, in Institutional Investor‘s “All-America Research Team.” He was recognized six times as a Wall Street Journal “Best on the Street” analyst.

Gauging Sentiment and Value: Social Finance Tools Help Take the Market's Temperature

Social Media Strategies For Investing: How Twitter and Crowdsourcing Tools Can Make You a Smarter Investor by Brian D. Egger