Adrian HollidayCan tweets help you trade smarter? Ting Li, professor of Digital Business, from RSM Rotterdam School of Management, Erasmus University, reckons social media can boost your trading success.
Her team – including colleague Dr Jan van Dalen and Pieter Jan van Rees, who pioneered the research as part of his thesis – scrutinised more than 1m tweets. Each contained stock mentions from the S&P 100. They then developed an algorithim that broke down buying sentiment, be it buy, sell or hold.
How they did it:
- Borrowing computational linguistics methods they went through an intense process of language detection and slang removal to boost their analysis accuracy
- They then simulated a set of trading strategies using microblog features. Data was analysed on a daily and a 15-minute basis
- Underpinning these methods was a belief that stock microblogs generate, share and spread information virally may have a contagion effect. “Disagreement in microblog messages positively influences stock features, both in interday and intraday analysis,” Li says
The ostensibly interesting bit is how this fintech sniffed out tweeted sentiment – a lot of ear-wigging on America’s biggest companies, from Apple to GE to Wells Fargo – with real-time follow-on price fluctuations (though trading volumes, which are also affected by ‘bullishness’, weren’t judged).
Can Twitter really help you trade better? ShutterstockNoise = movement = edge
The conclusion drawn? When an S&P 100 stock is constantly tweeted – even if there’s a mass of opposing argument about its prospects – the brute amount of noise around it means it performs better. Essentially agreement levels are being measured here.
“In the simulation we showed that if you invested money in the S&P 100 and used the information gleaned from twitter using our algorithm, you would beat the market.”
Out ahead?
Li says you could invest in one company, sell at the end of each day and reinvest the next. Or you could trade every other day or every three, four or five days. “Even when you take transaction costs into consideration, you’d still come out ahead.”
In other words, tweets around stocks don’t just build ignorance or insight (depending on the quality of the information). They supply a performance kicker.
“It can be concluded,” Li’s team report said, “that leveraging the information of expert users who have a larger follower-ship, have higher levels of mentions…can be used to amplify the relationship between bullishness and trading volume or volatility.”
Beware the Trump Tweet: ShutterstockPick your venue
Perhaps. But this modelling has taken place during a very long momentum bull run. Traditionally, stock prices moved on real news. Not micro-blog clamour where the winner is the one who shouts loudest for longest, even if a good measure of consensus emerges.
The more serious space for discussion about trading strategies, volatility, fundamentals – debt and cashflow levels plus management quality – not to mention trading costs and entry and exit points is found on trading and investment forums.
Some traders won’t follow the S&P 100. It’s too big or just plain unsexy. The faster-flowing, freer currents elsewhere offer more potential for traders. (Having said that the early February 2018 stock price falls offered plenty of adrenalin though they come off many intraday moves of less than 1%.)
However to be fair to this new research, the S&P offers a super-abundance of tweets on well-known household names.
Careful on how you compare and contrast The trouble with Dad & Ivanka
Not long ago the Wall Street Journal put together the Trump Target Index – 12 stocks that had been hit by President Trump’s tweeted outbursts. Over a period of 12 months this index was up more than +32%, well past the Dow Jones Industrial Average.
It also found that many stocks targeted by Trump rebounded strongly within the same trading day.
“My daughter Ivanka,” tweeted The Donald on 8 February 2017, complaining that the US nationwide retailer had dropped his daughter Ivanka’s products from their product line-up, “has been treated so unfairly by @Nordstrom. She is a great person -- always pushing me to do the right thing! Terrible!”
Ivanka Trump with husband Jared Kushner, before Donald Trump was elected President: ShutterstockNordstrom’s market value dropped – about -0.6% – but then rapidly recovered, pushing deep into the green. By the day’s end Nordstrom’s share price was up a massive +4%.
Market talk – sentiment – has always affected stock prices. The ‘new’ bit to this is that Twitter is where some of these conversations are taking place. It’s inducing some volatility – which traders can profit from in certain circumstances – so it's a tool to use. But tweets and consensus are not a 7am profits warning from the horse’s mouth.