Using sentiment towards stocks and shares is an essential tool for retail investors to use in gaining a more holistic understanding of Wall Street. But is it possible to keep up with the high-power insights at the disposal of some of the market’s biggest analytical machines?
There are many ways that market sentiment can be used as a fundamental analysis tool for institutions the size of hedge funds and day traders alike. With a sharp focus on the treasure trove of social media and automation technology, our capabilities in understanding the direction that markets are taking have been given a shot in the arm over recent years.
As much as 75% of hedge funds frequently use news and social media feeds as part of their investment process, while 80% of investors are keen to access more alternative data sources in general, such as private company data, logistics insights, and evaluated pricing, which are particularly sought after.
Monitoring different news and analyses, including information freely available on social media, has become imperative for retail investors when learning how to trade stocks. In a landscape that’s been made more dynamic with the emergence of AI and the proliferation of social media, sentiment analysis is more important than ever before.
The Evolution of Institutional Sentiment Analysis
For Wall Street’s most resourceful institutions, like hedge funds, sentiment analysis has evolved way beyond identifying retail trends and listening in on r/WallStreetBets.
As early as 2015, hedge funds were using satellite imagery to access real-time data to generate a series of metrics. One leading sentiment-based analysis saw satellite images of parking lots belonging to major retailers to analyze foot traffic and predict sales volumes ahead of official earnings releases.
Today, sentiment analysis can be fine-tuned using primary data to anticipate stock market performance with great accuracy. Eagle Alpha, an alternative data provider firm, has suggested that parking lot car counts using satellite imagery can forecast same-store sales growth with a correlation that’s as high as 0.9.
Is it Possible to Trade Sentiment?
So, what about retail investors? Is it possible for all traders, even those who lack the resources of hedge funds, to make trades based on sentiment insights?
Sentiment enjoys a particularly close relationship with trading volume, which can help to offer insights into rising and falling interest. It’s this market volatility linked to sentiment that can cause significant fluctuations in company share prices that retail investors will be capable of taking advantage of.
The most effective way of trading sentiment is to detect fluctuations before trading volume peaks, as this will help traders make the most of short-term price movements surrounding specific stocks or wider exchange-traded funds (ETFs).
Sentiment in the Age of Artificial Intelligence
To accurately gauge sentiment, retail investors would have to be adaptable enough to constantly monitor unstructured social media data and react at a rapid pace to changing attitudes towards a stock. While this is virtually impossible to carry out manually, artificial intelligence can help to empower traders to autonomously monitor for key sentiment changes.
Utilizing the power of natural language processing (NLP) and machine learning (ML), AI services are growing in sophistication to provide real-time insights into social media sentiment. This analysis can interpret the emotions of users and their respective opinions regarding financial news, brand trust, and other factors that could impact stock market performance.
While these tools can be expensive, ranging into thousands of dollars, they can significantly benefit day traders who could use ML insights to adapt quickly to market conditions and execute trades before wider markets catch up with new trends.
Navigating Social Media Sentiment
We’ve also seen use cases emerge for manual social media sentiment analysis. Mihai Tanase, a senior professional engineer and data analytics enthusiast, utilized Reddit’s API to extract data from stock market-focused subreddits like r/WallStreetBets, r/Stocks, and r/StockMarket to access valuable sentiment insights.
Using a process that examined 200 posts and 20 comments before refining it to 50 daily posts to maintain the relevance of the analysis, Tanase focused on titles and selftexts to seek out emerging sentiment trends.
With the help of WordCloud’s Library and a Sentiment Intensity Analyzer, Tanase was capable of identifying positive sentiment toward certain stocks due to the prevalence of terms like ‘market’ and ‘higher’ and how they can point to stronger buying interest.
The approach was deemed to be effective when utilized alongside wider analytics tools to quickly identify unusual sentiment trends that could be used to shape a short-term trading strategy.
Gauging Sentiment
There are also plenty of metrics that can be used to gauge more generalized sentiment towards stocks as it’s taking place. Notably, the Volatility Index (VIX) offers real-time insights that represent the implied volatility of Wall Street stocks over the coming 30 days. Using options prices as a foundation, the index reflects the consensus view of future expected stock market volatility.
Additionally, the Bullish Percent Index (BPI) measures the percentage of stocks of certain exchanges that appear to be gathering short-term price momentum.
When compared and contrasted with primary sentiment analysis on social media and other alternative data sources, these tools can be excellent in aligning findings against the wider market consensus to discover fresh trading opportunities.
The Path to Informed Decisions
For retail investors, understanding sentiment towards stocks is one of the biggest challenges faced in keeping up with their institutional counterparts. However, with the right tools and market knowledge as a foundation, it’s possible to gain powerful insights into the direction that sentiment is taking toward stocks and act accordingly.
By incorporating sentiment analysis with your wider trading strategy, it’s possible to outpace your competitors and get the most out of your approach to executing trades. This can help form a sustainable platform to grow your Wall Street acumen.
Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.
