I got an invite last week from Jim Cramer to join Investfeed, a startup with a UX that is Twitter-like. Investfeed, is a new player in the field of crowdsourcing investments ideas from social media. StockTwits has been around since the 2008 crisis and is actually the pioneer of the $hashtag on stocks on Twitter.
Image from Investfeed site
Keynes said that the market is more like a beauty contest. That can be interpreted that an investor should focus not only on fundamental values but also on what the crowd values and where that will lead the price of the stock. I like to think of it as a tip for a starting point for the casual stock player:
Start form getting a sense of what the people think that are flirting or investing money in the market.
Using social media to assist in investment decisions is not a breakthrough. Much like investors use some technical indicators on top of fundamental analysis or momentum guidelines in addition to conventional discounted cash flow analysis; DIY investors these days are looking to quantify and incorporate into their investment decision making the trending investment actionable (hopefully) ideas. They can at least use these tools to narrow down their watchlist.
Social trading, copy and or mirror trading, that we have discussed from different aspects in the past has to be distinguished from these Twit&Feed marketplaces. They are mainly crowdsourcing sentiment and quantifying investment trending themes from Social media. Some may try to monetize by showcasing those subscribers that develop a track record over time (high volume of followers combined with statistically good investment tweets). Others may monetize by advertising from the companies that are discussed or by using the data that is structured through these marketplaces.
StockTwits offers an open API with all the sentiment data that is sourced from their community.
Images sourced from StockTwits site
This includes: message volume; sentiment history (bearish vs bullish) and heatmap visuals. Quantopian (the DIY open sourced algorithmic trading place) users have already linked to such data to develop and backtest a long only algorithmic strategy based on sentiment.
These measures provided by socially sourced financial sentiment, are used in conjunction with others (e.g. a financial analyst recommendation) to buy or sell a stock or a market index, or to implement a contrarian strategy, or to gage “risk on” vs. “risk off” sentiment; the Social media fed information is not to be confused with social trading. The latter refers to crowdsourcing managers (FX traders, option traders, and stock traders). Social media sourced financial information is strictly confined to crowdsourcing financial information whether actionable or not. If Keynes subscribed to these Twit&Feed marketplaces, he would use the sentiment measures of how the “hoi polloi” interpret earning announcements or management changes or other events that change the way a company is perceived. I checked out Fireye, $FEYE, the cyber attack Nasdaq favorite that plummeted after its earnings announcement and seems to be in no-mans land; only because I own it. Looked at the sentiment graph which tells me that it doesn’t make sense to sell here (bullish sentiment still dominates). Parsed the tweets and got a sense that nobody sees a support level in sight yet (no mans land). So, watch this stock that has a plummeting price but with a bullish sentiment intact.
I also checked for Financial services stocks that are trending. FIS came up, so it entered into my radar screen. Social media can also provide a sentiment gage for companies that are sensitive to research reports because they are misunderstood by the market or operate in industry sectors that are out of favor or recently traumatized. High frequency trading could be one such sector, or the automotive industry following the VW scandal coupled with the ongoing development of autonomous cars.
Social media sourced financial information can capture a sudden boatload of web articles on a specific subject. These sites are becoming the first stop for obtaining financial information. A casual stock-acholic doesn’t go directly to Seeking alpha or to the free MotleyFool version to get stock market insights; he or she may rather go first to these social media sentiment providers because like Twitter they help to screen from the overload of information. Also, for those that are just scratching the surface, like a stay-home mom or dad looking to start managing a stock portfolio, screening through social media maybe a could start. Much the same way, one starts a journey in e-shopping.
We have always had such measures that attempt to capture sentiment. Some via the option market, others from technical indicators, even survey indicators like the AAII Investor Sentiment Survey which measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months (individuals are polled from the ranks of the AAII membership on a weekly basis; Only one vote per member is accepted in each weekly voting period). Often financial journalists use the investor sentiment indicators as contrarian; a bearish investor sentiment, pointing to a bullish market.
Social media crowdsourced sentiment has its place in the investment decision making process but is competing with many other approaches and considerations. The trick is to keep it simple for stock-acholic retail and valuable to the bottom line, which is the buy and sell decision.
At the institutional level, there are CRM systems that already incorporate sentiment indicators (e.g. Investglass) and their ability to integrate these tools with other systems is more essential.
Fundamental research, technical analysis, behavioral analytics, and then structured and unstructured data processing for decision making and risk management, and natural language based actionable decisions; are major categories of angles to approach investment decision making. Fintechs offering services in these areas can be a whole other topic.
Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.