Sentdex Analysis

Sentiment analysis accuracy

How Accurate Can Sentiment Analysis for Stocks Be?

Harrison Kinsley

8/29/2013

Last updated: 9/25/2013

The two most popular questions that I get asked are:

"How accurate is sentiment analysis for stocks?"
"How accurately can Sentdex actually read sentiment?"

I believe both of these questions can be answered with the same information. I have always felt that a great way to test the accuracy of sentiment analysis was with stocks, since I believe they are directly correlated. Either sentiment goes up first because the company does well, or sentiment goes up because the stock is performing well. Either way, sentiment analysis should show it!

The third most popular question I get is:

"What kind of indicator is it? Lagging, forward...etc?"

Sometimes it is a forward indicator, especially when news stacks up. Sometimes it is lagging, usually when massive bits of news come out. It doesn't use stock prices or volume at all to derive data, and really should not be thought of at all like any indicator you've ever seen.

Sentiment, Sentdex, and stock price are not always perfectly aligned, nor do they always move to the same degree. Sometimes, however, they do.

In the interest of showing multiple moving averages with the Sentdex charts, we usually show the stock price on top, and the analysis of sentiment on the bottom graph, making things easier to read.

...but what if we did an overlay with stock price and sentiment on the same figure?

Here are some charts with sentiment analysis overlaid on top of the company's stock price:

Click on the image to enlarge it.

Alcoa Inc:

Alcoa Inc

Here, we can see Alcoa (AA) and notice a large change occurring between mid May 2013 and mid June 2013. Here are a few of the events that led to the negative impact of Alcoa sentiment:

$8.6B in debt.

Early May 2013: Price of aluminum declining (Alcoa is an aluminum producer), due to a global over-supply of it.

Mid May 2013: Alcoa downsizes as it cuts 500 jobs and 2 production lines.

Late May 2013: Moody's downgrades Alcoa's credit rating to "speculative" from "investment-grade."

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AbbVie Inc:

AbbVie Inc

A lot of AbbVie (ABBV) stock price directional movement is in direct relation to the S&P 500, though the positive sentiment for this company definitely shows. In the same time span the S&P 500 is +11.96% compared to ABBV with a +17.39%. This is quite the substantial difference that the positive sentiment makes.

ABBV has continued to see great results from their behemoth drug, Humira. Some of the sentiment analysis came out negatively, especially regarding the worries that AbbVie success is too dependent on a single drug. That said, AbbVie has continued to show success with their newest Hepatitis C drug therapy, which continues to show positive outlook.

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American Electric Power:

American Electric Power

American Electric Power's main issue here is the growing problem of declining demand, and regulations. Both of these things, coupled with their high pollution leaves the sentiment for AEP stock weak.

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Allergan, Inc.

Allergan, Inc.

The drug and medical device producer has continued facing problems almost constantly during this time span, which has had major impacts on its sentiment.

Allergan's major drop, like many others, was caused by a downgrade. This one came from Goldman Sachs on June 21st 2013 to a "neutral."

In late June 2013, the FDA suggested that it was possible for generic forms of their dry-eye drug, Restasis, could come to market sooner than expected.

The 2nd largest drop for AGN occured at the beginning of May 2013, caused by two studies being delayed for up to two years.

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American Tower Corp

American Tower Corp

American Tower Corp (AMT) has been suffering in sentiment and stock price for the majority of this time frame.

The most recent rise in sentiment and price came from their purchase of Global Tower Partners for $3.3B. This was an integral deal for AMT, mostly because Global Tower Partners owned ~5,400 cell towers.

If nothing else, Muddy Waters Research has proven to be a thorn in the side of AMT, accusing them of fraud and deception. One example of this is when Muddy Waters Research looked into the reported $585.4M purchase of Brazilian towers, claiming that the deal was truly $300M. Among a batch of investments from AMT, the concern is possibly that AMT is using their acquisitions as a bit of a smoke screen. That said, recently, the worries have seemingly been lifted as the cell-tower business is truly booming, which suggests that AMT is actually successfully growing.

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Bank of America

Bank of America

Bank of America (BAC), according to their fundamentals, is possibly undervalued. Bank of America appears to be still tainted, sentiment-wise by contributing to the mortgage fraud that ultimately helped lead to the financial crisis. Most recently, this is definitely the case, with sentiment continuing to weaken with BofA in the news and going to court over this.

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BlackBerry

BlackBerry

BlackBerry (BBRY) has been quite the hot topic for a while. The largest drop in price here (June 28th 2013), and the drop in sentiment around it, was caused by BlackBerry's quarterly reporting coming in even worse than the already "low" expectations. After this, sentiment continued building up, and share price ultimately spiked when BlackBerry put itself up for sale.

As a sale was not happening, sentiment for the phone maker began to subside, ultimately to the point where BlackBerry decided to go ahead and come out earlier than their upcoming quarterly report to warn about upcoming losses that were, again, worse than the already "low" expectations. It seems like they were trying to possible avoid having the same outcome as the last quarterly report had on share price.

Interestingly enough, at the new price of under $9, Fairfax, BlackBerry's largest holder, seemed like it was going to purchase BlackBerry for $9 a share. That said, we can see that this has not actually helped BlackBerry sentiment at all, nor has price come up to $9. In fact, people are doubting that the deal will even occur, and the price closed at $8.01 Sept 25th 2013, just days after the impending-sounding deal was announced.

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The Bank of New York Mellon Corporation

The Bank of New York Mellon Corporation

The Bank of New York Mellon (BK) sentiment has been fairly wild, and mostly correlated in direction to the S&P 500. That said, the current sentiment for BK is in the negatives, and the stock is also currently under-performing the S&P500 in this time frame with the S&P 500 +11.96 and BK +9.55%.

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Citigroup Inc

Citigroup Inc

Much like the declining points of BofA in sentiment and price, Citigroup also shows similar signs, with talk about mortgage fraud in the declining periods. Citigroup also appears to follow the same waves as the overall S&P 500, which makes it interesting, since this based on pure sentiment for Citigroup, and not the overall markets or prices.

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CMS Energy Corporation

CMS Energy Corporation

This is a great example of catching factors that people typically miss. Around the same time as our sentiment rating was dropping like a rock for CMS, expectations for CMS were that CMS would actually earn more than the expected amounts (sounds funny to say).

Sure enough, CMS did "beat expectations" (even though that was actually in line with expectations, and I would argue already priced in).

In this time span, the only point where CMS was outperforming the S&P 500 was the first initial rise until the drop in late April 2013. CMS stock's highest outperforming point was indeed when all of the articles were coming out regarding the liklihood of CMS beating expectations, and becoming priced in. Since this point, with the fall in sentiment and price, CMS has under-performed. The S&P 500 in this time-frame is +11.96% compared to CMS +1.23%, which is obviously a substantial difference.

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CenturyLink, Inc.

CenturyLink, Inc.

CenturyLink has been in near-constant sentiment decline. On May 14th, 2013, Moody's raised CenturyLink's credit rating slightly, but still was considering it "speculative grade." CTL (-3.58%) has underperformed the S&P 500 (+9.03%) in this time frame.

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Dicks Sporting Goods Inc

Dicks Sporting Goods Inc

The largest drop in price and sentiment for DKS shown here is on Aug 20, 2013, following lower than expected earnings. After that, the subsequent strongest rise in both price and sentiment started with "oversold" speculation.

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DTE Energy Co

DTE Energy Co

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eBay

Stock sentiment analysis compared to price

eBay

eBay sentiment has been very enjoyable to watch compared to price. eBay has been one of the more active stocks as far as volatility is concerned, and it has been very cool to see how accurate sentiment has been reflected. There are times with eBay where sentiment doesn't precede the stock price, but still matches quite closely. Since the primary objected for Sentdex is to measure sentiment, I still consider this one of my best charts.

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Edwards Lifesciences Corp

Edwards Lifesciences Corp

As is the trend with many of the companies shown here, the largest drop in price and sentiment here was the result of missing earnings for Edwards Lifesciences Corp. Edwards Lifesciences Corp works on technologies focused on treating structural heart disease. The main reason for their earnings miss was due to underselling as many heart values as expected.

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Foot Locker, Inc.