Twitter: The Newest Stock Market Indicator

By Jean Folger | December 23, 2010 AAA
Twitter: The Newest Stock Market Indicator

Investors and traders are always looking for the next best method for predicting the future price movements of the financial markets. While many technical and fundamental analysis tools exist to assist market participants with identifying opportunities, every now and then a new, outside-the-box indicator comes along. (Check out some other unsual market indicators in World's Wackiest Stock Indicators.)

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In the past, some of these indicators have included the Hot Waitress Economic Index, which theorizes that more "hot" or good looking servers are employed during a weak economy; the Leading Lipstick Indicator, which purports an inverse correlation between lipstick sales and the state of the economy; and the Skirt Length Theory, which speculates that long skirts, which represent fear and gloom, are worn during bearish periods, and short skirts, showing excitement and confidence, are worn during bullish times.

One current economic indicator suggests that investors can predict future price movements based on "tweets", musings that are posted via Twitter, an online social networking service. Derwent Capital Markets, a London based investment firm, is so sure that human emotion can be evaluated through the study of tweets, it is launching a new hedge fund that will use this new market indicator to predict stock market moves. (Learn more about the business behind the Twitter brand in 5 Private Companies Worth Billions.)

The Twitter Effect
Twitter, a website owned and operated by Twitter, Inc., hosts a social networking service. Members can send and read messages called "tweets" that are up to 140 characters in length. It is estimated that 190 million Twitter users post more than 65 million tweets per day. In 2009, Pear Analytics, a San Antonio based market research firm, evaluated the content of tweets and found that 40% were "pointless babble", 38% were "conversational", 9% had "pass-along value", 6% were "self-promotion", 4% were either "news" or "spam". The majority of tweets fell into the pointless babble category, which includes tweets about what people are doing and thinking, and, perhaps most important to this study, how people are feeling. And due to the causal nature of Twitter, people tend to tell it like it is a few words at a time with messages like "I'm so psyched!" to "I had a really bad day".

By evaluating what people are tweeting about and focusing in particular on the language, researchers at Indiana University believe they have found a correlation between collective moods and the direction of the Dow Jones Industrial Average. In a study released in October, the researchers analyzed more than nine million tweets, using an algorithm that measures the language used on Twitter, taking into account six moods: happiness, kindness, alertness, sureness, vitality and calmness. The theory goes that when overall tweeting language is calm, the Dow Jones Index has a tendency to rise; when overall tweets are anxious, the index has a tendency to fall.


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Human Emotion
Human emotion has long been known to affect market activity: fear, greed, irrational exuberance and other emotions drive prices up and down, often dramatically. In the past, investors have tried to gauge human emotion with lipstick sales and skirt lengths, but the Twittersphere may offer a more intimate and accurate look into how people are feeling. While it is difficult to quantify human emotions, social networking certainly has some potential when it comes to getting a sense of what a large group of people are thinking or feeling. (For more on market psychology, see The Financial Markets: When Fear And Greed Take Over.)

Other Indicators
While Twitter seems to be an interesting, "from the horse's mouth" methodology for determining human emotion, other indicators may allow investors to make deductions regarding the overall mood based on certain behaviors. These include:

  • Google Trends
    Researches can analyze hot search topics on Google, helping investors to predict upcoming economic activity such as home sales trends.

  • Men's Underwear
    This indicator was suggested by Alan Greenspan, the former chairman of the Federal Reserve. It surmises that men will purchase fewer unmentionables when times are tight.

  • Power Toothbrushes
    Power toothbrush sales are believed to rise as the economy falls. The reason? People will spend more money on at-home oral hygiene in order to avoid expensive trips to the dentist.

  • Romantic Escape
    Research has found that during economic downtrends, sales of Harlequin Romance novels and subscriptions to online dating service Match.com both rise.

  • Unclaimed Bodies
    This one's a bit grim, but because of the high costs associated with funerals, there may be more unclaimed bodies during tough economic times. According to USA Today, some cities provide publicly funded cremations for unclaimed bodies, while others may be donated to science.

The Bottom Line
In addition to the generally accepted methods of predicting stock prices, new, sometimes odd, tools emerge. New economic indicators based on social network activity, such as the research based on tweets, provide interesting insight into the general mood of the more than 190 million Twitter users. With the growing, seemingly unstoppable popularity of social network services, this may be yet another tool investors can use. But, just as with any other market indicator, whether it can really predict market moves with any accuracy is likely to become a matter of debate.

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