CXOadvisory Investing Notes

Blog- Investing Notes

By CXO Advisory Group LLC. | 18 February 2008

Are prominent stock market bloggers in aggregate able to predict the market's direction? The Ticker Sense Blogger Sentiment Poll "is a survey of the web's most prominent investment bloggers, asking 'What is your outlook on the U.S. stock market for the next 30 days?'" (bullish, bearish or neutral) on a weekly basis. The site currently lists 30 contributing bloggers. Participation has changed over time. Based on results from Guru Grades and other stock market sentiment studies [[e.g., Investor Intelligence's famous weekly survey of investment newsletters' advice: normxxx]], we hypothesize that blogger sentiment: (1) mostly reacts to what just happened in the stock market; and, (2) does not predict stock market behavior. Using the 81 aggregate measurements from the poll since inception, we find that...

Because Ticker Sense collects data weekly, we look at weekly measurements and changes in weekly measurements. Because the poll question asks for a 30-day outlook, we test the forecasts against stock market behavior four weeks into the future. We use the S&P 500 index to represent the U.S. stock market. Because polling takes place Thursday-Sunday, we use the coincident Friday close to represent the state of the stock market for each poll. For example, the close of 1331 on Friday, 2/8/08 coincides with poll results for Monday, 2/11/08. We use [% Bullish] minus [% Bearish] as the net sentiment measure for each poll.

The following chart compares the coincident S&P 500 index and net blogger sentiment over the past 84 weeks (there were no surveys for 11/27/06, 1/1/07 and 11/19/07). Net blogger sentiment was mostly negative for the first year, but switched to a more bullish regime in the summer of 2007. On these visually comparable scales, blogger sentiment is much more volatile than the stock market. The fairly large week-to-week swings in net blogger sentiment suggest either that the bloggers are very sensitive to changes in market conditions, or that participation in polling varies considerably across weeks. A persistent change in participation could explain the switch to a more bullish outlook [[Note: this has been documented for the weekly survey of members (Investor sentiment) by the American Association of Individual Investors: normxxx]].

For a more precise test of the relationship, we look at poll-to-poll changes in net blogger sentiment versus associated stock market returns.


Click Here, or on the image, to see a larger, undistorted image.

The following scatter plot relates poll-to-poll changes in net blogger sentiment to weekly changes in the S&P 500 index for concurrent intervals. If bloggers as a group react to what just happened in the stock market, a best-fit line would run from the lower left to the upper right. Based on 80 poll-to-poll changes, there is little support for this hypothesis. The Pearson correlation for these data is 0.23. The R-squared statistic for the relationship is 0.05, indicating that the change in the stock market over the past week explains 5% of the change in blogger sentiment during that week [[or simply pure chance, since I am assuming he is using 95% confidence intervals.: normxxx]]. Moreover, the 'best-fit' line has flattened considerably in recent months.

How well does net blogger sentiment predict future stock returns?


Click Here, or on the image, to see a larger, undistorted image.

The next scatter plot relates the 4-week future change in the S&P 500 index to net blogger sentiment:

• If net blogger sentiment significantly forecasts stock market behavior, a best-fit line would run from the lower left to the upper right [[and with relatively little deviation from the line: normxxx]].


• If net blogger sentiment is a significantly contrary indicator for stock market behavior, a best-fit line would run from the upper left to the lower right [[and with relatively little deviation from the line: normxxx]].


• If net blogger sentiment does not predict stock market behavior at all, the plot would show no pattern [[and would assume the appearance of a circular blob: normxxx]].

Based on 77 observations, the data indicate that bloggers are a somewhat contrary indicator for the stock market. The Pearson correlation for the distribution is -0.34, suggesting that bloggers as a group lean somewhat the wrong way with respect to future stock market direction. The R-squared statistic is 0.12, meaning that net blogger sentiment explains about 12% of stock returns over the next month [[which, again, I am assuming is in the realm of pure chance (since he omitted to include a significance test): normxxx]]. As sample size has grown, these statistics have varied considerably.


Click Here, or on the image, to see a larger, undistorted image.

In summary, analysis of Ticker Sense Blogger Sentiment Poll results suggests that aggregate blogger sentiment has some contrary predictive power for future market direction.

For related research, see Blog Synthesis: Sentimental Journey.