What is Stock Market Sentiment?

Stock market news sentiment generally refers to the overall tone or sentiment of news stories about individual stocks, topics pertaining to stocks, or the stock market at large. This can include news stories from various sources, such as financial news outlets, blogs, newsletters, and social media — in our case, we refer to the broader landscape of text being written about stocks online across all these platforms as “news”, whether it’s written by a professional journalist or not.

The term sentiment broadly refers to any measurable indicators of mood, tone, or attitude being expressed about a given subject. This sentiment can (and often does) have an impact on the attitudes and behaviors of investors. For example: if the majority of news stories about a stock have a positive sentiment, it could help to boost investor confidence and encourage buying activity. On the other hand, if the majority of news stories have a negative sentiment, it could lead to decreased investor confidence and selling activity.

Gauging Stock Market Sentiment

Sentiment can be measured by reading the news manually, and that is the way most people gauge the overall mood about stocks currently (aside from tracking stock price alone). However, there are a number of challenges and issues with the current stock market news / social media landscape that can make it difficult for investors to get the information they need to make informed decisions in a timely manner. Four primary considerations when manually gauging stock market sentiment include:

Volume

‍A primary challenge is the sheer amount of information and news available about the stock market. With so many news sources and individual opinions published daily online about the stock market (literally 100,000’s of posts per day), it can be difficult for investors to sort through it all and find the information that is most relevant, reliable, and actionable. This can lead to confusion and misinformation, which can make it harder for investors to make good decisions.

Bias & Manipulation:

‍Another challenge is the potential for bias and manipulation in stock market news. Some news sources may have a vested interest in certain stocks or investment strategies, and may publish news stories that are biased or misleading in order to influence investor behavior. This can make it difficult for investors to get a clear picture of what is really happening in the market, and can lead to bad investment decisions.

Misaligned Incentives

A third challenge — and perhaps the biggest issue — is that many news sites rely on on-page advertisements as a primary source of revenue. This can misalign incentives, and lead news outlets to directly or indirectly obscure useful news information. Publishers who create content for ad-based news outlets are often incentivized to write content with click-bait titles or convoluted structures in order to drive more clicks and keep readers on the page longer, so that they can serve readers advertisements.

Speed & Volatility

Finally, the speed and volatility of the stock market can also make it difficult for investors to keep up with the latest news and developments. With prices and trends changing rapidly, it can be hard for investors to stay on top of the latest information and make decisions that are based on the most up-to-date insight.

Tools for Measuring Stock Market Sentiment

Stock market sentiment can be measured using natural language processing (NLP) tools that analyze text data from news articles, social media posts, and other online sources. These tools assign sentiment scores (positive, negative, or neutral) based on the language used, helping investors gauge the overall mood surrounding a particular stock or market.

There are two main components in the process of measuring stock market sentiment: 1) finding relevant chatter about a stock, and 2) analyzing the sentiment of said chatter.

Here are some popular tools you can use to help you measure stock market sentiment:

Google Alerts

This is a free tool from Google that allows you to set up alerts for keywords or phrases of your choice, and receive notifications whenever new content containing those keywords or phrases is published online. You can use this tool to set up alerts for specific stocks or the overall stock market, and then manually monitor the sentiment of the news stories that are published. We have a full step-by-step guide to using Google Alerts for trading stocks that we recommend referencing.

Social Media Monitoring Tools

‍There are many tools available that allow you to monitor social media for specific keywords or phrases, and track the sentiment of the posts and comments that are made about those keywords or phrases. Some examples include Hootsuite, Mention, and Brand24. These tools, however, are designed with the purpose of aiding in brand marketing, and generally are not tuned to be used easily in measuring sentiment about stocks and stock market language in particular

News Sentiment Analysis Tools

There are also a handful of tools that are designed specifically for analyzing the sentiment of news stories and other online content. These tools typically use natural language processing and other techniques to identify sentiment features within a news story and to assign positive, neutral or negative scores. Some examples of these tools include Lexalytics, Sentiment140, and Vantage Point. These tools are a starting point, but are not fine-tuned for finance language, and thus do not always represent true sentiment perfectly through a stock market lens.

Uptrends monitors stock market news and measures sentiment expressed about individual stocks, sectors, and topics relating to the market. You can easily see which stocks are trending in online chatter, and track how their news sentiment (positive or negative) has changed over time relative to the stock's performance (it's also free to create an account)

Trading Strategies Using Sentiment Analysis

Investors can use sentiment analysis to identify potential buying or selling opportunities.

Tracking Overall Sentiment

One way to use news sentiment to trade stocks is to monitor the sentiment of news stories about a particular stock or the overall stock market. If the sentiment of the news stories is generally positive, it could be a good time to buy the stock, as other investors may also be feeling optimistic and be more likely to buy. On the other hand, if the sentiment of the news stories is generally negative, it could be a good time to sell the stock, as other investors may be feeling pessimistic and be more likely to sell. The impact of sentiment on price may depend on a number of factors, such as the overall volume of news, the time window over which the sentiment is being expressed, and the makeup of investors actively trading the stock in consideration.

Gauging Sentiment of Individual Articles or Posts

Another way to use news sentiment to trade stocks is to look for news stories that have a particularly strong positive or negative sentiment. For example, if a news story has a very positive sentiment and is likely to have a big impact on a particular stock, it could be a good opportunity to buy the stock before other investors catch on and drive up the price. Similarly, if a news story has a very negative sentiment and is likely to have a big impact on a particular stock, it could be a good time to sell the stock before the price drops.

In either use case, it is important to note that news sentiment is just one factor to consider when trading stocks, and it should not be the only basis for making investment decisions. It’s always a good idea to do your own research and consider other factors, such as a company’s financial health and performance, before making a trade. That said, if you’ve done the research and feel confident about such underlying aspects of stock performance, sentiment can serve as an important differentiator for determining when to buy or sell.

Limitations and Best Practices of Sentiment Analysis for the Stock Market

While sentiment analysis can provide valuable insights, it should not be the sole basis for investment decisions. It's essential to combine sentiment data with fundamental analysis, technical analysis, and other research. Additionally, be aware of potential biases and manipulation in online content, and always exercise due diligence.

In conclusion, stock market sentiment plays a crucial role in investor psychology and can influence stock prices. By leveraging sentiment analysis tools like Babbl, investors can gain a better understanding of the prevailing mood surrounding stocks and make more informed trading decisions. However, it's important to use sentiment analysis in conjunction with other research and analysis methods for a well-rounded investment strategy.