Can Tweets and Status Updates Really Predict Stock Market Moves?

Consider this scenario: Facebook NasdaqA company goes public. It receives a flood of attention on Facebook and Twitter in the days leading up to its IPO. After the social media blitz, its stock fizzles, and a little later, a study emerges showing that -- coincidence? -- most of those posts and tweets had been negative.

Failed companies are nothing new to the stock market. What is new, however, is social media -- a platform where general public opinion, positive or negative, is available for all to read.

Following a long line of bizarre beat-the-market strategies, a new theory has emerged that suggests tweets and status updates can be used to foresee a company's fluctuations on Wall Street. Is it crazy enough to work?

The Study That Started It All

A paper out of Indiana University analyzed millions of Twitter posts in relation to the Dow's performance from August to October 2008. According to its findings, the amount of tweets that were categorized as "calm," or lacking in extreme emotion, matched up with the Dow's turns three days in advance, with 86.7% accuracy.

In short: The market rose when there were a lot of calm tweets, and fell when there weren't.

It's hard to deny the overlap here, but let's not forget that the period from August through October 2008 was a time of Wall Street panic. Public attention to the Dow was particularly high, so more people were tweeting about it. This likely gave the study much more information than it would have had under everyday circumstances. After all, it isn't every day that #StockMarket is a trending Twitter topic, so this could impact the Social Media-Stock Market Movement theory's long-term overall effectiveness.

This Theory Could Be Right

One of the most vocal supporters of the study is Paul Hawtin, who created the world's first "Twitter hedge fund," Derwent Capital Management. The fund monitored company stock performance side-by-side with social media "sentiment" and picked stocks based on its findings. The fund was only in business for one month, and in that time its overall 1.86% returns outpaced both the market at large as well as the average hedge fund's performance.

Hawtin shut down DCM so he could revamp it into a trading platform that provided "sentiment analysis" to the run-of-the-mill investor. The new model is just a few months away from launch. In the meantime DCM has provided a graph charting the "Twitter sentiment" linked to another high-profile Wall Street tweet fest: the IPO of Facebook (FB).

Social media predictions
Source: Derwent Capital Website.

As shown on an infographic on Derwent Capital's website, from May 18 to Aug. 17, 2012, general Facebook sentiment seemed to move in step with the company's performance as a stock. When sentiment dropped, so did the stock, and when it rose, it was a good day for investors.

But does that mean you should fire your broker and start analyzing your mini feed?

This Theory Could Be a Lot of Hooey

If there is one lesson the stock market has taught us time and again, it is that no one single principle is ever completely consistent or reliable. Not the Efficient Markets Theory, not the Random Walk Theory, and certainly not this budding new Social Media Theory.

The only rule here is that there are no rules, and a star can rise and fall in the blink of an eye, without explanation. This is part of what makes the market so exciting to follow.

Statistics, formulas, and market-busting mathematics can be thrown around until everyone is blue in the face, but ultimately this social media guessing game is one that is likely to lose. For one thing, these charts and graphs rely on buzzwords that are completely subjective. Whether a tweet is "happy," "sad," or "calm" can be twisted whichever way the Great and Powerful Chart Maker wishes, and who's to say it knows when a tweet is sarcastic?

The SEC is well aware of the potential dangers in using social media for investing purposes. It has issued numerous warnings about social media's tendency to be "landscape-shifting," and has threatened legal action against any advisor who abuses the platform for their own financial gain. In short, this method of stock picking is extremely volatile.

Still want to analyze charts, graphs, and formulas to your heart's content? Stick with numbers that are proven to correlate with a company's performance: its financial statements. A glance-over of a business's debt, free cash flow, and net income will give you a much better idea about a company than knowing how many people have "liked" it.

Social media stats may provide an interesting new perspective, but they should, at best, be supplemental to the rest of your research.


Motley Fool contributor Caroline Bennett does not own shares of any company mentioned here. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook.

Increase your money and finance knowledge from home

Behavioral Finance

Why do investors make the decisions that they do?

View Course »

Investing in Startups

The lucrative and risky world of startups.

View Course »

Add a Comment

*0 / 3000 Character Maximum

6 Comments

Filter by:
Hammad Tauqeer

Vippennystocksite dotcom, is just an amazing site for ERBB Stock and I have subscribed to it

November 08 2012 at 12:02 AM Report abuse rate up rate down Reply
Grigory Leps

Total FRAUD WRITING SERVICE - Crawford Street, London (that's What They Say On The Site!!) London

Purchased a order to have my research paper revised and improved from (TOTAL FRAUD SITE FROM MY EXPERIENCE!!) and they charged full 217 US dollars promissing the written and revised paper in 2 days. Days went by from 2 to 4 and I then found about fraud from this site and ASKED IMMEDIATELY for refund and I get some STUPID excuses!!!

For startes I got ripped off as they DONT seem to have professional writers and dont deliver on time and now my money is not returning anytime soon with excuses that the refund lady is busy with other transactions!!

This site is a total scam and I've read more evidence as I searched the next. Please someone help me from this TOTAL FRAUD!!!

Interpol should INVESTIGATE AND HUNT DOWN THESE FRAUDS!!! They are fooling honest people all over!!!

Navneel
melbourne
Australia

This report was posted on Ripoff Report on 9/13/2008 4:00:49 PM and is a permanent record located here: The posting time indicated is Arizona local time. Arizona does not observe daylight savings so the post time may be Mountain or Pacific depending on the time of year.

Ripoff Report has an exclusive license to this report. It may not be copied without the written permission of Ripoff Report.

Oh yeah, when they charge it is through -
on your statement.

Interpol should INVESTIGATE AND SHUT DOWN THESE JOKERS!!!

complaint response
AUTHOR: Eugene - London (United Kingdom)
SUBMITTED: Saturday, October 25, 2008

Thank you for your complaint.

It is very rare that a writer is late with one of your orders, and we have revised another one of your papers 3 times with 3 different writers and you are still not happy.

We are working with more than 640 writers worldwide for 3 years already. There are some cases when even experienced writers with good ratings take too many orders because they work with several custom writing companies at the same time. As a result a writer can be late with one of his orders.

November 07 2012 at 7:43 AM Report abuse rate up rate down Reply
Grigory Leps

Total FRAUD WRITING SERVICE - Crawford Street, London (that's What They Say On The Site!!) London

Purchased a order to have my research paper revised and improved from (TOTAL FRAUD SITE FROM MY EXPERIENCE!!) and they charged full 217 US dollars promissing the written and revised paper in 2 days. Days went by from 2 to 4 and I then found about fraud from this site and ASKED IMMEDIATELY for refund and I get some STUPID excuses!!!

For startes I got ripped off as they DONT seem to have professional writers and dont deliver on time and now my money is not returning anytime soon with excuses that the refund lady is busy with other transactions!!

This site is a total scam and I've read more evidence as I searched the next. Please someone help me from this TOTAL FRAUD!!!

Interpol should INVESTIGATE AND HUNT DOWN THESE FRAUDS!!! They are fooling honest people all over!!!

Navneel
melbourne
Australia

This report was posted on Ripoff Report on 9/13/2008 4:00:49 PM and is a permanent record located here: The posting time indicated is Arizona local time. Arizona does not observe daylight savings so the post time may be Mountain or Pacific depending on the time of year.

Ripoff Report has an exclusive license to this report. It may not be copied without the written permission of Ripoff Report.

Oh yeah, when they charge it is through -
on your statement.

Interpol should INVESTIGATE AND SHUT DOWN THESE JOKERS!!!

complaint response
AUTHOR: Eugene - London (United Kingdom)
SUBMITTED: Saturday, October 25, 2008

Thank you for your complaint.

It is very rare that a writer is late with one of your orders, and we have revised another one of your papers 3 times with 3 different writers and you are still not happy.

We are working with more than 640 writers worldwide for 3 years already. There are some cases when even experienced writers with good ratings take too many orders because they work with several custom writing companies at the same time. As a result a writer can be late with one of his orders.

The average customer rating of our service is 9.5 out of 10. Considering the fact that our writers work remotely we cannot fully control their activities; therefore we cannot prevent 100% of mistakes.

Since you have placed your order through 2CheckOut.com, in legal terms we are not the providers of the service. The provider of the service is 2CheckOut.com Delware, US, in relation to which, we are just vendors. This is clearly stated on our web-site and also in agreement with 2CheckOut company which you accepted when paying with your credit card. Therefore 2CheckOut company processes all the refunds and you should send your refund request directly to them.

According to the information provided by 2CheckOut Company, you were issued a full refund. You can check this by looking at your credit card statement. Please consider that an information update of your credit card statement can take up to 2 weeks in your bank.

If you want to avoid such situations in

November 07 2012 at 7:42 AM Report abuse rate up rate down Reply
veganutz

If you were smart and had a little cash then you should invest NOW in "POT Stocks" before it is too late! Stocks such as ERBB, CBIS, HEMP, there are many more and currently they only cost pennies! After one of the 3 states vote to make marijuana legal for those 21 and older, You can bet pennies that these stocks will go flying through the roof and your pennies will turn into millions!

November 01 2012 at 9:42 PM Report abuse rate up rate down Reply
Eric

If you were smart and had a little cash then you should invest NOW in "POT Stocks" before it is too late! Stocks such as ERBB, CBIS, HEMP, there are many more and currently they only cost pennies! After one of the 3 states vote to make marijuana legal for those 21 and older, You can bet pennies that these stocks will go flying through the roof and your pennies will turn into millions!

November 01 2012 at 9:41 PM Report abuse rate up rate down Reply
bailoutsos

Get everyone believing something and it comes true. Except the WMDs were never found.

November 01 2012 at 4:38 PM Report abuse rate up rate down Reply