RavenPack | August 02, 2013
In this study, we develop a market level sentiment indicator showing that companies subject to negative sentiment contain more information on the general market environment than companies subject to positive sentiment.
Executive Summary: We evaluate our indicator by constructing a simple investment strategy that goes long or short the return spread between the S&P500 Index versus the MSCI ex. U.S. index when their sentiment spread is positive or negative, respectively.
Our study demonstrates that sentiment spread shows strong predictive power over longer investment horizons. The strategy not only seems interesting from a relative value point-of-view, but also from a tactical asset allocation perspective.
Companies with negative sentiment contains more information on market environment than companies with positive sentiment
Sentiment spread shows strong predictive power over longer investment horizons
When considering news about companies, we typically find a strong positive sentiment bias. It is only when sentiment is at its worst that the ratio of positive to negative news gets close to 1. Such changes seem to be driven not only by an increase in the amount of negative news, but also by a drop in the amount of positive news flowing to the market. Due to information expansion and contraction, we find it reasonable to believe that more information about the market environment can be found amongst certain subsets of our equity universe. Given that such effects are most pronounced during market turmoil, on average, most value is likely to be found by tracking companies with negative sentiment rather than positive - something we'll address as part of this paper.
Figure 1 below plots the cumulative change in the count of positive and negative news across U.S. companies. We highlight two periods where the difference in the amount of negative to positive news goes through a period of expansion and contraction. One period relates to the Dotcom bubble and the second to the recent Financial Crisis
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