Information Is Power - CFA Institute Is Power Inside The Global Brain Aleksander Fafuła, PhD, Chief Data Scientist MarketPsych Data LLC

Information Is Power Inside The Global Brain

Aleksander Fafuła, PhD, Chief Data Scientist MarketPsych Data LLC

<[email protected]>

Presentation outline

1.Brief information about MarketPsych

2.Data production process

3.Seven social media and news data

secrets revealed

• MARKETPSYCH HAS BEEN

DEVELOPING FINANCIAL SENTIMENT-

BASED INVESTMENT MODELS SINCE

2004.

• Team has experts in natural language

processing, cloud computing and behavioral

economics.

• Published research in academic journals,

textbooks, and two award-winning books.

• Frequent appearances in financial media

including WSJ, CNBC, FT and Bloomberg.

MarketPsy Long-Short Fund L.P.

MarketPsych Macro Feed

The process behind MARKETPSYCH text analytics

The content inside the data feed.

professional news social media

Thomson Reuters MarketPsych

Indices

Entities by asset class

US Equities Currencies Agricultural

commodities Materials

and Energy Countries

41 119 29 12 22

Afghanistan

Algeria

Angola

Argentina

Armenia

Australia

Austria

Bahrain

Bangladesh

Belarus

.

.

.

United Arab Emirates

United Kingdom

United States

Uruguay

Uzbekistan

Venezuela

Vietnam

Yemen

Zimbabwe

Australian Dollar

Brazilian Real

Canadian Dollar

Chinese Yuan Renminbi

Danish Krone

Egyptian Pound

Euro

Hong Kong Dollar

Indian Rupee

Israeli Shekel

Japanese Yen

Mexican Peso

New Zealand Dollar

Norwegian Krone

Russian Ruble

Singapore Dollar

South African Rand

South Korean Won

Swiss Franc

Taiwanese Dollar

Turkish Lira

U.S. Dollar

U.K. Pound Sterling

Cattle

Cocoa

Coffee

Corn

Cotton

Hogs

Orange Juice

Palm Oil

Rice

Soybeans

Sugar

Wheat

Aluminum

Biofuels

Coal

Copper

Crude Oil

Ethanol

Gasoline

Gold

Heating Oil

Iron

Jet Fuel

Liquefied Natural Gas

Naphtha

Natural Gas

Nickel

North Sea Oil

Palladium

Platinum

Rare Earths

Silver

Steel

Uranium

4 Equity Indices:

S&P 500

Russell 2000

Nasdaq 100

DJIA

10 TRBC Sectors, e.g:

• Technology

• Energy

• Telecommunications

18 TRBC Business Sectors and Industries

2 Hybrid, ex:

• Construction

• Leisure and Entertainment

7 ETFs, ex:

• Global Copper Miners

• SPDR Regional Banks

US Equities Currencies Agricultural

commodities Materials

and Energy Countries

Shared Fields: Sentiment, Optimism, Fear, Joy, Trust, Violence, Conflict, Urgency, Uncertainty

Price

PriceForecast

ConsumptionVolume

ProductionVolume

RegulatoryIssues

SupplyVsDemandForecast

Surplus

AcreageCultivated

AgDisease

Subsidies

SubsidiesSentiment

WeatherDamage

Price

PriceForecast

CarryTrade

CurrencyPegInstability

PriceMomentum

MarketRisk

BudgetDeficit

CentralBank

ConsumerSentiment

CreditConditions

Default

EconomicConflict

EconomicGrowth

EconomicUncertainty

ElectionSentiment

FinancialSystemInstability

FiscalPolicy

GovernmentAnger

GovernmentCorruption

GovernmentInstability

Inflation

InterestRate

InvestmentFlows

MonetaryPolicy

NaturalDisasters

RegimeChange

SocialInequality

SocialUnrest

TradeBalance

Unemployment

Price

PriceForecast

MarketRisk

AnalystRating

Anger

EarningsForecast

FundamentalStrength

Gloom

Innovation

Layoffs

Litigation

Mergers

Stress

Volatility

Price

PriceForecast

ConsumptionVolume

ProductionVolume

RegulatoryIssues

SupplyVsDemandForecast

Surplus

NewExploration

ProductionCost

SafetyAccident

TRMI FOR EACH ASSET CLASS

Data sample

Data consistency

Courtesy of Elijah DePalma, Thomson Reuters

7 SECRETS REVEALED

1. Various sectors and their pictures

2. Seasons for emotions

3. Advisors from Twitter

4. Earning Calls and communication styles

5. MACD indicators

6. Country and currency rotation strategies

7. GDP forecasts

2011 TRMI EXAMPLES: Technology (IYT), Energy (XLE), Airlines (FAA)

Medium

Medium

High

Low

Low High

Fundamental Strength

Sto

ck P

rice

Fo

reca

st

INDUSTRY CLUSTERS

Sto

ck P

rice

Fo

reca

st

Medium

Medium

High

Low

IYT

XLE

Low High

FAA

Fundamental Strength

PRICE SERIES AND SENTIMENTS

FAA

IYT

XLE

CONDITIONING TIME SERIES

Original “Outlook”

psychvar (SPY)

Seasonality Trends

MONTHLY ANGER

What is the most hated month?

MONTHLY JOY

Which month is the most joyful?

Retail investors and their posts

2 693 779 signals

7 792 “StockUp”

14 728 predictions:

6 936 “StockDown”

120 days

R1?

QQQ

Predictions from Message Boards

39%

61%

StockDown

Positive Negative

41%

59%

StockUp

Positive Negative

Earning Calls: Communication styles

Y: Bullish

X: Possibility

IBM

DELL

MACD indicators

Global perception: Market Risk 2013-08-31

Country data derived from textual analysis of global social media and news.

Global perception: Sentiment 2013-08-31

Country data derived from textual analysis of global social media and news.

Country Rotation – Macro Indexes

Country Rotation

• “Buy to the sound of cannons, sell to the sound of trumpets”

• ~ Baron Nathan Rothschild, 1812.

FINDINGS

Over longer periods, extreme sentiments are typically followed by contrarian reversals. Primary indicators are Joy, Urgency, Government Instability.

ROTATIONAL STRATEGIES

Long-short portfolios are formed each observation, taking positions of country indexes at the extremes of sentiment with high Buzz.

Extremes arbitrage

Equity curve – country rotation model

Currency Rotation

FINDINGS

Extreme sentiment movements in the short-term typically follows momentum while long-term shows reversion. Notable indicators are Market Forecast, Optimism, Trust, Uncertainty.

ROTATIONAL STRATEGIES

Long-short portfolios are formed each observation, taking positions of currencies (against USD) at the extremes of sentiment with high Buzz, including the country’s sentiment.

• Australia

• Brazil

• Canada

• China

• Eurozone

• France

• Germany

• India

• Italy

• Japan

• Russia

• United Kingdom

• USA

Economic models

Economy / Growth

Economic Growth TRMI, 12-month average, 1999-2013: • Australia (AU) • Brazil (BR) • Canada (CA) • China (CN) • Germany (DE) • Eurozone (EZC) • France (FR) • United Kingdom (GB) • India (IN) • Italy (IT) • Japan (JP) • Russia (RU) • USA (US)

Question: How can we validate that the TRMI track actual economic activity

around the world?

MPMI – predicting the GDP

MPMI – predicting the GDP

• Models are updated daily • Huge coverage

Economic model /U.S. Statistics

Model R2 = 0.97 Min 1Q Median 3Q Max

-2.25 -0.65 0.22 0.73 2.22

Table: Residuals of the model 2008-2013

Negative influence

Positive influence

Summary

• It’s up to you how to use the behavioral data.

• Data is challenging.

• Experience and data understanding teaches

which techniques are the best.

• There is a lot of undiscovered alpha.

• Evidence suggests News and Social Media can

predict prices.

USING SENTIMENT IN DISCRETIONARY DECISION-MAKING

36

Newsletter - (START HERE)

www.marketpsych.com

Sentiment tools, dashboards,

charts, strategies, indicators

Knowledge base

YOUR QUESTIONS

37

THANK YOU! The MarketPsych Data Team

Richard Peterson, M.D.

Aleksander Fafula, Ph.D.

Changjie Liu, MFE

Diego Gutierrez, CTO

Nareg Khoshafian

Eugene Smolanka

Zulma Cao

Brandon Smietana

Marcelo Sousa

Alex Verinikin

Alexey Karakulov

Mike Klein

Jacob Kozinn

And many interns…