How to spot the next investing hype, narrative or trend using sentiment analysis

In a previous article I explained how behavioural flaws leads to predictive behaviour of investors and how to measure that. This lead to an innovative stock market indicator. In this article we will dig one level deeper and look at how sentiment can be used to get insight in niches of investing with actual examples. This article explains on which domains to focus and why, what metrics are important and finally some real-word examples. For all domains interactive dashboards are available at: Trend reports — Alternative Analytics (alternative-analytics.eu)

Policy sentiment vs SP500 — www.Alternative-Analytics.com

Which domains?

  • Trends — e.g. crypto, cannabis, solar power etc. Which trend is getting more attention, either positive or negative?
  • Narratives — e.g. Covid-19 news, stimulus news, trade war news. 2020 has shown how a narrative can keep stock markets in its hold. Covid-19 comes to mind. However narratives on stimulus (will it pass or not) might be even more interesting due to the binary nature and direct effect on the stock market.
  • SPACs — SPACs are currently the new interesting kid on the block. They are hard to value especially when there isn't an acquisition target but sometimes rumours move a SPAC value away from its intrinsic value. Sentiment and media exposure without a doubt plays a part in that and keeping track of it can offer interesting opportunities.
  • Sectors — Tech, Industrials, Materials etc. Maybe not the first that domain that comes to mind. However capital flowing to a certain sector can also be influenced by sentiment. Moreover sector rotation is also visible in sentiment.

What metrics do we look at?

  • Exposure of one topic compared to another topic — Eg the exposure of Tech sector vs Industrials sector
  • Exposure of a topic over time — E.g. is the US-Chinese trade ware getting more or less exposure?

We can take this analysis one step further by looking at sentiment of these topics. Determining sentiment is done with AI as described in a previous article (How AI, alternative data and insights from psychology resulted in an innovative stock market indicator | by AlternativeAnalytics | Dec, 2020 | Medium). This gives us two similar metrics to the exposure metrics, namely:

  • Sentiment of one topic compared to another topic — Eg the sentiment level of one SPAC vs a comparable SPAC
  • Sentiment of a topic over time — Eg is Covid-19 news getting more positive?

The usage of these metrics becomes most evident by looking at some examples, which is done next.

Some real life examples

Excerpt from the Alternative-Analytics.eu trend report — Trend reports — Alternative Analytics (alternative-analytics.eu)

Covid-19 and the financial policy

Excerpt from the Alternative-Analytics.eu trend report — Trend reports — Alternative Analytics (alternative-analytics.eu)

Trend investing — Crypto and Cannabis

Excerpt from the Alternative-Analytics.eu trend report — Trend reports — Alternative Analytics (alternative-analytics.eu)

Some final words

Hoping to add some creative ways of looking at quantitative finance

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store