Twitter Inc and Google Inc are good indicators of the stock market, says a new research paper from the European Central Bank (ECB). Authors state investor moods and sentiment expressed on the microblogging website through are effective stock market prognosticators.
Twitter, Google the Answers for Stock Trading?
Simply put: what people are saying on Twitter or searching on Google can indicate if a stock is heading up or down during that day’s trading session.
They came to this conclusion by analyzing daily tweets and searches including the words “bearish” and “bullish” to garner investors’ views on a certain day. Afterwards, researchers compared these views to real stock market moves.
Bullish behavior showcased on Twitter influences Google searches in the following week. Therefore, Twitter information actually precedes the tech giant’s searches.
Here is an excerpt from the ECB’s paper trio of researchers on its Twitter Sentiment Index:
Twitter bullishness has a statistically and economically significant predictive value in respect of share prices in the United States, the United Kingdom and Canada,” wrote Huina Mao and Johan Bollen from Indiana University and Scott Counts of Microsoft Research.
“We further observe that high Twitter bullishness indicates an increase in daily returns on the following day, with there being a return to normal levels within the next two to five days.”
Canadian, U.S. and British stocks were affected by Google and Twitter sentiment. There were changes in equity market indexes when there are Google searches for bull and bear market. When it comes to tweets, China is immune because they use Weibo rather than Twitter. ECB researchers encouraged others to conduct similar research with Weibo.
Interestingly, this is particularly the case in extreme market conditions. For example, Google bullishness touched bottom in mid-2008, before the market turmoil of late 2008 and early 2009 in the United States, United Kingdom and Canada,” the authors wrote.
“Similarly, Chinese Google bullishness reached a peak in early 2007, preceding the market peak of early 2008. Subsequently, a declining trend of bullishness was followed by a downward trend in the market until 2009.”
Do you plan to concentrate on Twitter for your investing strategies? Don’t do it, warns the ECB researchers.
The ECB researchers note that Twitter is effective in trading, but only for the short-term. According to the European bank, Twitter bullishness leads to gains in daily returns on the following trading day, but they return to normal two to five days after.
In other words, don’t change your long-term investments based on tweets.
This paper comes as Twitter has been facing its own challenges on the stock market and its executive team.
Can You Really Predict the Stock Market?
The ECB’s research on Twitter is the first of its kind. But other past research has concluded that no one can really predict if the stock market will go up or down.
For example, in 2013, CXO Advisory Group compiled data from market forecasters since 1998. It tracked and graded a large number of market forecasts made by financial experts. Gurus were the main focus. What were the results? Just 48 percent of these market experts were accurate in their predictions. The best guru had a 68.2 percent and the worst guru had just 21 percent.
Paul Goodwin of Cabot Wealth Advisory also wrote that you can’t predict the stock market. He wrote you’re better off picking quality stocks and holding them for a long period of time.
The Harvard Business Review’s Jeff Stibel penned an in-depth piece explaining how Wall Street, whether it’s a market expert or computer model, also can’t accurately pick stocks.
Here is an interesting tidbit from the article:
We believe that models that have accurately predicted the future in the past, are likely to predict the future going forward. But that is no more true than believing me when I tell you that a coin will land heads up just because I accurately predicted it would do so the last ten times.”
So using Twitter as an indicator for stocks may be fun, but will trading firms begin to use the website? Perhaps or perhaps not.
One thing is for sure: the tweets of rumors of Google acquiring Twitter will be interesting for stock picks.