Noise, Sentiment and StockTwits

Don't be Sentimental

As we saw in Idiot Noise Traders it very much looks like there are people out there trading on the random oscillations in markets – which themselves make predicting the markets extremely difficult, particularly at times when irrational noise traders are dominating proceedings by synchronising their behavior. If this hypothesis is true then increasing ease of access to real-time internet trading data and opinions ought to be making markets less efficient, rather than more.

This implies that a contrarian investor should be looking to bet against the noise traders, rather than against the performance of stocks, so it’s of significant interest to figure out what the current sentiment of day traders is. Some recent research on the behavior of investors using the microblogging site StockTwits offers some interesting clues to whether this might work.

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Nowcasting With Google

Real-time Forecasting

One of the problems for students of matters financial is that predicting stuff is very difficult, especially when it’s about the future. However, this pales into insignificance with the greater problem that we can’t even predict the present. In economic terms, basically, we really have no idea what’s happening in the world at any given time.

Predicting the present, snappily known as “nowcasting” is an area that economists spend lots of time worrying over, developing really neat algorithms that work right up to the next time they don’t. However, the rise of the internet has opened a new window on the world and analysts are now starting to nowcast by looking at trends emerging from data culled from the web. Perhaps, just perhaps, this can be turned this into a model which is near enough real-time to stand some chance of being useful.

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Twits, Butter and the Super Bowl Effect

Eclipse of the Twits

As we more or less know, the sheer randomness of the world makes predicting stockmarket movements not so much a fool’s game as Russian Roulette. If you believe you can outwit the markets on a day to day basis it’s only a matter of time before the hammer falls on a firing cap.

Despite this people keep trying, because it’s a basic human urge to try to make sense out of the nonsensical. The ancient Chinese believed a solar eclipse was caused by a celestial dragon munching up the Sun. At the time that counted as advanced thinking: indeed it still does in some parts of the world, but generally it’s a lot harder these days to believe that people could think stockmarket movements can be predicted, say, by something as random as the trivial ramblings of posters on Twitter. Can’t be right, can it?

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