In this video we explain how our S-Factor feed uses the Twitter firehose to build trading signals, dashboards and widgets to help investors increase alpha. To find out how SMA can help your firm, email us at ContactUs@SocialMarketAnalytics.com or schedule a meeting using our 1 on 1 Meeting Signup.
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Today I will explore decile groupings based on S-Scores, and plot cumulative subsequent returns. We typically focus on an S-Score > 2 for subsequent positive movements in stock prices, and an S-Score < -2 for negative movements in stock price.
Our metrics identify when a conversation becomes significantly more positive or negative than normal. Most stocks have normal conversations on any given day. On these days there are other factors driving the security. “Normal” conversation securities will typically follow the market, as you see in the SMA data set. High sentiment out-performs and low sentiment under-performs, Open to Close, and Close to Close, across Twitter and StockTwits.
The only filter we add is that the prior day’s closing price must be above $5, to avoid penny stocks. Total return time series are used for returns, and time series are equal weighted.
The first chart illustrates subsequent Open to Close returns based on S-Score deciles at 9:10 a.m. Eastern time. As you can see, the deciles are in order with top decile securities out-performing and bottom decile securities under-performing. SPY is represented by the black line and the universe is blue.
Pre-Market Close deciles are below. S-Scores are taken at 3:40 p.m. Eastern and Close to Close returns are calculated. Again, high S-Score securities out-perform and low S-Score securities under-perform, with the universe in the middle.
StockTwits is the largest chat community for active traders. Its users are professional traders discussing long and short positions. The below chart looks at S-Score decile returns based on StockTwits conversations.
Data is consistent across deciles. A unique characteristic of the StockTwits feed is that there are significant short conversations. The lowest two deciles have negative returns. This is a function of the StockTwits community being able to short securities by direct short selling or taking net short options positions.
Pre-market close deciles are below.
To learn more about Social Market Analytics and the products we offer please visit our website, or contact us here.
Thanks,
Joe
Social Market Analytics (SMA) aggregates the intentions of investors as expressed on the StockTwits platform. SMA creates proprietary S-Factor metrics that quantitatively describe the current conversation relative to historical benchmarks. This data provides strong predictors of future price movement. This blog will focus on the deterministic nature of the StockTwits data set when aggregated into SMA S-Factors. StockTwits is a community for active traders to share ideas enabling you to tap into the pulse of the market: http://stocktwits.com/
The charts and tables below illustrate the subsequent open to close return of stocks that are being spoken about abnormally positively or abnormally negatively on StockTwits twenty minutes prior to market open. Sharpe and Sortino ratios for the theoretical portfolios are included as well. The SMA S-Score looks at the current conversation relative to historical benchmarks and creates effectively a Z-Score.
The Green line below is an index of subsequent open to close return of stocks with abnormally positive conversations on StockTwits prior to the market open. The Red line is an index of the subsequent open to close return of stocks with an abnormally negative conversation prior to market open. The black line represents the market open to close return and the blue line represents a theoretical long/short portfolio.
These charts clearly illustrate the predictive information present in the StockTwits message stream. If there was no predictive power in the StockTwits data set the Green, Red, and Black lines would be nearly identical -statistically not the case. These signals are available at 9:10 am Eastern time well before the market open.
The chart below looks at the full SMA history of StockTwits based S-Factors. The theoretical long portfolio has a Sharpe Ratio of 1.53, theoretical short portfolio -.82 Sharpe and LS portfolio has a Sharpe of 3.68. Sortino Ratios are above one as well. There is strong predictive power in this data.
The last year has been particularly challenging for the Hedge Fund community. Below is a chart with the performance of the theoretical portfolios broken out from 1/1/2015 to current. As you can see these portfolios performed well in this volatile market period.
For more information on these data sets please contact Pierce Crosby: (pierce@stocktwits.com) or Joe Gits: (joeg@socialmarketanalytics.com)
Regards,
Joe