Read our interview with Peter Cruddas Peter Cruddas here.
From the graphic, the answer to whether social media can move markets is clearly yes. But it’s probably more self-perpetuating than just social sentiment.
There are a plethora of social sentiment tools out there. More often than not they are contrary indicators. Take the Investors Intelligence Advisors Sentiment report for example. It’s been going since 1968 and looks are professional advisors sentiment in the markets.
Basically, the more bullish all the professional advisors are the higher the likelihood that a bull market is about to come to an end. Likewise, if the number of bearish advisors increases, it’s a good sign that the market is about to recover.
Sentiment trading works best at extremes
Obviously, social sentiment works better at extremes, but if you overlay the chart with the S&P over there is some pretty clear anecdotal evidence to support how sentiment can be used to predicate market moves.
However, social sentiment is a little different. There are plenty of tools that scan the market to look for positive and negative sentiment like CityFlacon, AcuityTrading or trading.co.uk. These are decent sources as they weed out the general news fluff and give you an interesting gauge of investor perception towards a stock.
Social sentiment moving the markets through perception
Perception is a major factor in the valuation of companies because the net cash value of a company is generally nowhere near what that the market capitalisation is for listed stocks. Listed companies are either massively overvalued or undervalued.
Stock exchanges, don’t show the actual value of a company, just what buyers and sellers expect it to be in the future.
Social sentiment can be self-perpetuating
If there is generally negative sentiment out there. It stands to reason that people are devaluing the company, and will, therefore, sell shares. Clearly, if there are more sellers than buyers the stock will go down.
Social sentiment as a leading indicator for market moves
However, as much as sentiment is a leading indicator, it is a leading indicator after the fact in that if there is negative sentiment it should already be built into the price.
So if sentiment is horrific and everyone is bearish, it’s a contrary indicator and perhaps time to buy. That’s what old Warren Buffett says anyway. If it’s a value play, the best time to buy is when no-one else wants to because that’s when a stock is cheapest.
It’s like support and resistance lines in technical analysis. Support and resistance levels are largely irrelevant to the valuation of a company and often appear around big figure pricing. But they are there, everyone knows they are there and will use those levels to trade from.
So if everyone is planning to close of their long positions when a stock fails to break through a perceived resistive level. It will become a resistance level because people are selling.
Individual twitter posts moving the markets
The other type of social sentiment is hugely influential people like Trump making statements on public companies and opportunistic short-term traders cashing in. Again, self-perpetuation.
Here’s the infographic from CMC Markets, that shows Donald Trump’s tweets and the subsequent market reactions.