One means of choosing stocks is to utilize mathematical models to determine such things as the stock price-to-earnings ratio. This helps investors determine if a particular stock is valued properly. One less traditional means of choosing stocks is via gauging investor sentiment to news stories and gauging sentiment on social media.
What is Market Sentiment? –
Market sentiment is the general feeling investors have towards a certain stock or towards the market in general. If they don’t like a particular stock or bond and sell it, the price of the stock will decrease.
There are a few indicators of market sentiment:
The VIX: The VIX is a fear index. The VIX is high when investors feel the need to purchase insurance to protect themselves from losses.
The High-Low Index: The High-Low index is derived by the comparison between the number of stocks that are making 52-week high valuations versus those making 52-week low valuations. When the index is below 30, stock prices are low, and the market is bearish. If the index has risen above 70, prices of stocks are high, and the market is bullish.
Bullish Percent Index: The BPI uses a formula to determine stocks that are bullish. When the BPI is at 80 percent or higher, stocks are often overvalued. If the BPI is around 20 percent or below, stocks are undervalued.
Companies that provide market sentiment information include:
Bloomberg Terminal –
According to Bloomberg, one can definitely improve their investing in the stock market by conducting a sentiment analysis on news stories and social media posts. It is a very technical subject, though.
For the past 10 years, Bloomberg Terminal has provided investors with sentiment data based upon reactions to news stories about companies. Today, they also take into account sentiment on social media.
In Bloomberg’s Terminal, every news story is assigned a positive, negative or neutral rating, based upon reactions. These are scored and provide a daily sentiment score that one can access before the markets open for the day. Bloomberg’s team suggests that investors purchase stocks that are in the top third of the sentiment rankings and sell the ones in the bottom 5 percent of their sentiment rankings.
Bloomberg advises that this strategy will not produce high yields if one is using the sentiment scores for only one company or a small group of companies. Instead, investors must diversify their portfolios in order to be successful with this strategy. With those guidelines in place, investors trading the top and bottom third of sentiment scores were able to receive a 23 percent return on investment.
Another strategy that the Bloomberg team tried was to buy stocks with positive sentiment the day prior to their earnings report and short those with negative sentiment prior to their earnings report. Using the S&P 500 and sentiment data from news outlets and Twitter, this strategy netted a return of 156 percent.
The problem with both of these strategies is that, with the need for diversity and the number of trades required to execute the strategy, the returns will not net much after the costs of making so many trades.
Chartcraft Indices of Investor Sentiment –
Bloomberg is not the only company that has worked on formulas for gauging investor sentiment. According to Investopedia, Chartcraft has created investor sentiment indexes. Investors use these indexes to try to track market sentiment changes that would cause bull and bear markets to begin to change.
For example, investors use Chartcraft’s Investors’ Intelligence Index in a contrarian manner when the markets show that they are either extremely bullish or bearish. If a market has swung too far in either direction, investors will typically take that as a signal a correction will soon occur in the opposite direction.
CNN Money Fear/Greed Index –
CNN Money takes a slightly different take on market sentiment. Its Fear and H Index takes into account seven indicators of whether investors are operating more from fear or greed. They look at the strength of stock prices, the demand that exists for junk bonds, put and call options, stock price breadth (determining whether there are more advancing than declining stocks in the market), the market momentum, whether investors are pursuing more stocks or bonds, and the volatility of the market.
According to The Balance, the FGI index can help investors determine if the prices of stocks are too high or too low. The Balance advises investors to use the FGI to enter the market when the index is moving towards fear. Then, investors can look for underpriced stocks to purchase. The Balance does suggest, though, that investors refrain from trying to use FGI for short-term profits. It is a tool that helps investors determine the best time to enter the market and purchase undervalued stocks that can be held for long-term profits.
Fisher Investments –
Fisher Investments analyzes stocks for their clients. They begin by looking at worldwide trends in politics, economics and market sentiment. These help them weight prospective stocks by country, sector and theme. Then, they use a screening process for stocks that has multiple stages to come up with their initial list of potential stocks. This narrow list of stocks are then rated by analyzing their fundamentals and risk.
You can read about investor’s opinions like Fisher Investment’s articles on Reuters.
Thus, there are market sentiment indices that are used to help investors choose when to safely enter a market. Some companies have created their own indices that are an amalgamation of other indexes. Also, one can consult articles and videos by leading investment firms, such as Fisher Investments, in order to know when market sentiment supports entering a market and when to sell stocks.
https://www.reuters.com/brandfeatures/fisher-investments-insights
https://www.bloomberg.com/professional/blog/finding-novel-ways-trade-sentiment-data/
https://www.investopedia.com/ask/answers/06/investorsentiment.asp
https://www.thebalance.com/how-fear-and-greed-index-can-guide-investment-4147563
Laurie Flood on Freelance Writing 