For as long as there have been stock markets, there have been investors trying to beat the markets.
Some investors use fundamental analysis: the deep perusal of financial statements and operating models, to gauge the health of a company and its future earnings. Other investors use technical analysis: the search for repeating and exploitable patterns in price action. Still others invoke macroeconomic conditions, or business cycles, or even sunspots, to inform their trading decisions.
A brief history of stock sentiment
One of the oldest and most lucrative investment strategies is also the simplest: sentiment analysis. If you know what other people think about a stock, you can profit from their positioning: buy when they’re panicking, sell when they’re over-confident. It’s easy money, if you can analyze the mood of the markets correctly.
Ah, but how do you do that? It’s not so easy, figuring out exactly what people think about a given stock.
Historically, in the absence of definitive information, traders would rely on anecdote, observation and pattern-matching. Listen to the shoeshine boy. Read the Wall Street Journal editorial pages. Count the profits at Delmonico’s. Track the price of fine art. Talk to friends and family, colleagues and counterparties. Run investor surveys.
The process was noisy, unscientific and hit-or-miss. The very best traders had an “ear for the market”; the worst were mere sheep, swayed by the crowd.
The explosion in publicly available opinions
But the internet changes everything. The internet is the greatest publication channel ever devised. It’s a mechanism for anybody, no matter how humble, to share their opinions and analyses. From 140-character instant reactions on Twitter, to novella-length valuation dissertations on Blogger or WordPress or Medium, everybody has a voice. Hedge funds compile 300-page slideshows and share them in public; industry mavens publish, and share, and re-share prediction articles on LinkedIn. And of course, there are more media sites and news aggregators and niche publishers than ever before. In short, there’s been an explosion in publicly available “opinions.”
The explosion in sentiment data has been paralleled by a massive increase in computing power and algorithmic sophistication. Not only is all that data available, we now have the tools to make sense of it all.
This is huge. It means that we can finally tap into the true psychology of the masses. We are no longer restricted to guesswork, sampling and extrapolation. We have a direct line into the wisdom (or foolishness) of crowds.
Taking the guesswork out of stock sentiment
The first stock sentiment analysis engines were complex, expensive, and available only to institutional investors. But the Alpha One Sentiment Database is changing that. It’s making institutional-quality stock sentiment data for over 5,000 US companies accessible via Quandl.
AOS provides deep, wide and timely stock sentiment data for professionals. Sources are monitored and scored with a 97% accuracy rate. Of course, the hard work of building a robust and profitable trading strategy remains, but success in sentiment-driven investing is no longer a question of data quality.