Think of sentiment as an ocean, where there’s a normal ebb and flow around a given stock. If you can identify a wave building in that ocean, you can ride it as it builds in positive momentum before it crests and ultimately fades.
What BUZZ tries to do is identify securities that are building that positive sentiment wave. Our access to data based on the social media posts of thousands of people who are independently and freely sharing means the data is free of the forced choices and other problems seen in traditional polling.
Essentially we can rise above what we’ve been conditioned to believe: that sentiment is the ultimate contrarian indicator.
In that traditional view of sentiment (see sidebar for more details), when the crowd is bullish it’s the top and vice versa when they’re bearish. But we’ve already written about the flaws in traditional polling that render them unreliable sources of opinion data.
From the BUZZ perspective, social sentiment doesn’t suffer from all the problems of polls and other past methods for gathering insight into stock prices.
A great example of sentiment momentum is Square Inc. (NYSE: SQ). With high-publicity CEO Jack Dorsey at the helm, it’s no surprise that the mobile payment company is a popular name discussed by investors across social media.
But since Square’s IPO in November 2015 at $9, it has been no stranger to volatility. It surged to $15 out of the gate and then dropped sharply back to $9, twice within the span of six months. Recently the stock has steadily grinded back to $15 and bullish sentiment on social media has increased as the stock has rallied, suggesting that investors believe SQ may be poised to finally break out for an extended move higher.
The increase in social sentiment propelled SQ into the BUZZ Index for the first time ever with a weight of 2.7% and among January’s top 25 holdings.
The BUZZ model is rebalanced monthly with the top 75 bullish U.S. stocks and made available in the BUZZ Indexes ETF. Invest with us today.
A contrarian view
Traditional sentiment is mostly used as a contrarian indicator. In other words, you’re better off doing the opposite of what most investors are likely to do with a given stock at a certain time.
Many contrarians view the market through “bear goggles”. This doesn’t mean they view the market as negative, necessarily—it’s more like they have a healthy skepticism of how the masses of investors feel about the market.
Those who say the market is going up, according to contrarian thinking, will only do so when they’re fully invested with no more purchasing power. But with the market reaching its nadir (or low point), those who predict a further downturn have already sold out—from that low point the market can only go up.
Extremely pessimistic sentiment on a stock may push the price so low that the risks of owning it are inflated. Figuring out which troubled stocks to buy and selling them once the company recovers, thus boosting the stock value, is the major play for contrarian investors.