7 days ago
Please shut up — if you're trying to make money in the stock market
Can you all just shut up?
That's not just a matter of preference — it turns out, the more people are chattering on social media, the worse future stock-market returns will be.
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A new research paper titled 'Market Signals from Social Media' studied millions of posts on StockTwits, Seeking Alpha and the social-media platform that used to be called Twitter and is now called X.
The researchers examined the sentiment of those posts as well as their frequency.
It found stock-market returns rise prior to high-sentiment days, followed by a reversal over the next 20 days, but returns decline prior to high-frequency days, followed by a continuation of negative returns.
This is true so much so that a trading strategy built around the findings would've produced excess returns averaging 4.6% with a Sharpe ratio — a measure of risk-adjusted returns — of 1.2, which would be a solid performance by Wall Street standards.
The research paper points out sentiment is driven by lagged returns, while attention, or frequency of posts, is predicted by lagged trading. Put a different way, sentiment is driven by past performance, while attention is driven by past volume.
And it's especially bad news rather than good that hits sentiment and increases attention. That meshes with theories of loss aversion.
The researchers — J. Anthony Cookson from the University of Colorado at Boulder, Runjing Lu from the University of Toronto, William Mullins from the University of California San Diego and Marina Niessner from Indiana University — looked at posts between 2013 and 2021.
That's a period that covered the 2013 to 2015 stock-market bull run, the 2018–19 trade war with China, and the onset of the COVID-19 pandemic.
Intriguingly, they also compared their results to looking at Google and Bloomberg searches for tickers, as well as daily news stories from the New York Times and Wall Street Journal, and found the social-media data was more predictive.
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