Marrying Social Sentiment And Momentum Investing

By Todd Shriber via Iris.xyz

Among factor-based investment strategies, momentum is one of the easiest to understand. The cornerstone of momentum investing is the thesis that stocks that have performed well (or poorly) recently will, for better or worse, continue doing so.

Advisers and investors can add a new, potentially efficacious layer to momentum investing by using social sentiment. The idea of marrying momentum investing and social sentiment data is practical. Think about it this way: even if an investor is not an avid Twitter user, chances are she can guess a few stocks that are frequently trending in the social media space.

To this point in 2018, stocks receiving plenty of play across the Internet and social media outlets include, on the positive side, Amazon.com Inc. (AMZN) and Netflix, Inc. (NFLX). On the less-than-enthusiastic side of the ledger, General Electric Co. (GE) would be an example of a trending name. In all three cases, these can be considered momentum stocks. Positive momentum for Amazon and Netflix and deteriorating momentum for GE.

The power of human emotions is one reason why momentum investing and social sentiment is a notable combination.

“A good example would be the purchase of a pair of jeans – rarely do we really think logically on the technical specifications and its benefits associated with the processes or material technology that was used to make the said pair jeans,” according to Berkshire Media. “We rely on the perception of whether we would look good wearing it. And this perception relies on what others think about the product as well.  The premise of emotional decision that influences the purchases above also fuels the herd mentality associated with bulk selling of stocks in the stock market.”

Social Sentiment Applications

Professional investors apply social sentiment data in myriad complex ways, but long-term investors can also derive benefits from studying social data.