close
Business
close
Investor's Psychology

Sentiment Analysis: Understanding The Market’s Emotions

Created on 03 Nov 2023

Wraps up in 7 Min

Read by 2.5k people

Sentiment Analysis - Insider by Finology

The stock market is a lot like those chatty colony aunties. You might wonder what the connection is, but believe it or not, both thrive on non-stop gossip, where whispers often carry more weight than a megaphone. πŸ“£

My journey into understanding sentiment analysis was quite accidental, almost like stumbling upon a unicorn among a group of horses. During the COVID-19 lockdown, with all the spare time on hand, I decided to do something productive. It was then that I got captivated by the ups and downs of the stock market and the intriguing behaviours of investors, leading me to uncover the untold stories behind each market move.

Just like a determined detective, I donned my deerstalker cap and began searching for clues. That's when I realised that the stock market isn't just about numbers and charts; it's about the sentiments steering those numbers. πŸ“ˆ And then I knew that sentiment analysis decodes the unspoken, tapping into how investors collectively feel and think. It's like reading between the lines of a story, but in this case, the story unfolds through market trends, social media, and news trends. 

In a world where stocks swing like tides, understanding these underlying emotions might just be the secret weapon in the financial game. So, let’s uncover the hidden language of stocks and explore the mysterious world of market feelings through sentiment analysis. πŸ”

Introduction to Sentiment Analysis

Let us start by understanding what sentiment analysis is. It basically refers to the process of analysing and interpreting human emotions, opinions, and attitudes expressed in various sources, such as news articles, social media, financial reports, and other sources of data. This analysis aims to gauge the overall sentiment or mood of investors or the public towards a particular financial asset, market, or economy.

It's a bit like trying to read the room but on a massive scale. Analysts use fancy tech like Natural Language Processing (NLP) and machine learning to sift through all these texts and figure out whether people are feeling positive, negative, or neutral about a certain investment. 

It's a bit like trying to read the room but on a massive scale. Analysts use fancy tech like Natural Language Processing (NLP) and machine learning to sift through all these texts and figure out whether people are feeling positive, negative, or neutral about a certain investment.Β 

Why do you think this matters? Well, it's because how people feel can actually affect how the market moves and the prices of assets. Before understanding how, take a look at the image below to get a better understanding of the process. πŸ‘‡

Before understanding how, take a look at the image below to get a better understanding of the process. πŸ‘‡

Let me tell you that sentiment analysis is valuable for traders, investors, and financial institutions in making more informed decisions. It can provide insights into market trends, investor behaviour, and potential market reactions. However, it's important to note that it is just one of the many tools in our toolkit that are used in financial analysis and should be used alongside other fundamental and technical analyses for a comprehensive understanding of the market.

Did you know that many studies have shown that over 80% of investors consider sentiment analysis while making investment decisions? I would say that’s a lot of 'listening' in the investor conversation! Let me guide you on where to discover these "sentiments." 🀨

What are the Sources of Sentiment Data?

Well, it's from a lot of places! We all have our own sources of news, one of which is the newspaper, which brings me to the question: have you ever read newspapers not just for information but to understand people's sentiments about the news? They reveal whether people are cheering for a new product launch or groaning at a market crash.

Your task is simple: adopt the role of a detective, gathering clues - just like I do. πŸ˜‰ Every tweet, article, or post represents a piece of the puzzle. πŸ•΅οΈ Other sources that can serve as valuable clues include:

  • Social media platforms like Twitter, Facebook, and Reddit
  • News articles and sites
  • Forums

Let's move on to know if all this talk really matters.

Sentiment and Market Performance Tango πŸ•Ί

Guess what? Just like we often check the sky to predict if it'll rain- that's how sentiment indicators can hint about stock prices. 

You know, there's this interesting research paper on ResearchGate that talks about how people's feelings on investing (sentiment) affect stock performance. 

  • It turns out that when people feel really good about investing, stock prices tend to go up. ⬆️ This happens because their positive feelings push the stock values higher than what the actual numbers say they should be worth.

However, later on, things change. 

  • The stock prices started to drop ⬇️ because they were too high compared to what they should actually be worth. This is known as a contrarian relationship – the idea that when stocks are overvalued due to high investor sentiment, they tend to fall back down later.

So, it's not just about how people feel about investing; it's about how their feelings change that really impacts stock prices. Cool, right?

Now, onto the…

Indicators Used to Measure Market Sentiment

I will discuss the three indicators that traders often rely on to sense the market's mood: 

  1. Volatility Index (VIX)
  2. High Low Index
  3. Bullish Percentage Index (BPI)

Now, let's look into each of these indicators for a better idea.

1. VIX - The Market's Weather Forecast

You know, the Volatility Index, often known as VIX, is like the weather forecast for the stock market. It measures how much the market is expected to jump around in the near future. Think of volatility as the speed and size of price changes – a fancy way of saying risk in the financial world. πŸ™ƒ

In India, we have our own VIX, based on the Nifty Index Options. It's like a crystal ball, predicting how much the market is likely to swing in the next 30 days. This number, usually expressed as a percentage (let's say 10%), is calculated from the best buy and sell prices of these Nifty Options.

Have a peek at this chart displaying the India VIX πŸ‘‡

In India, we have our own VIX, based on the Nifty Index Options. It's like a crystal ball, predicting how much the market is likely to swing in the next 30 days. This number, usually expressed as a percentage (let's say 10%), is calculated from the best buy and sell prices of these Nifty Options.  Have a peek at this chart displaying the India VIX πŸ‘‡
Source: Trading View

Now, calculating this VIX can be a bit of a task. They use some complex maths similar to what the Chicago Board Options Exchange (CBOE) uses, with a few tweaks to fit our NIFTY options market. Check out this infographic outlining the factors taken into account when calculating the India VIX πŸ‘‡

Check out infographic outlining the factors taken into account when calculating the India VIX

How it can be utilised for determining the market move:

The VIX, when high, is like a signal that investors might be feeling a bit jittery or foreseeing some big roller coaster moves in the market. It's often a heads-up for possible downturns. On the flip side, when the VIX is low, it's like the market's chilling out, all calm and stable. Traders use the VIX to get a feel for the overall mood of the market. 

Up next is the,

2. High Low Index - Stocks' Cheer-O-Meter

The High-Low Index keeps an eye on stocks reaching either their 52-week highs or lows. It provides insights into market momentum and strength. Now, let's know how this magic number is calculated ‡️

High Low Index - Stocks' Cheer-O-Meter The High-Low Index keeps an eye on stocks reaching either their 52-week highs or lows. It provides insights into market momentum and strength. Now, let's know how this magic number is calculated

How it can be utilised for determining the market move:

When the High-Low Index is soaring high, it indicates that lots of stocks are hitting new highs, signalling a super positive, bullish vibe in the market. Seems like the market is cheering for an upward trend! πŸ“ˆ

Conversely, when this index is taking a dip, it's a heads-up that the market might be losing its pep, maybe turning a bit bearish. This possibly means that the market is whispering about a possible downward trend. πŸ“‰

And that leads us to the final clue…

3. Bullish Percentage Index (BPI): Stocks' Fashion Sense

Simply put, the Bullish Percentage Index measures the percentage of stocks within a specific group that are exhibiting bullish technical patterns. It's calculated by counting how many stocks are signalling 'buy' and then dividing that by the total number of stocks in the mix.

How it can be utilised for determining the market move:

A high BPI often suggests a larger number of stocks showing positive technical signals, indicating a bullish market sentiment. A low BPI might signal a market where fewer stocks are demonstrating positive trends, potentially indicating a bearish sentiment.

Traders use these indicators, along with other market analysis tools, to get a sense of the market sentiment. However, it's essential to consider multiple indicators and not rely solely on one for making trading decisions. 

The Bottom Line

To summarise, I would say that the three indicators discussed above are trusted by the traders for a vibe check of the market.

  • VIX predicts the market's mood swings. 

High VIX means market jitters and low VIX means stability. πŸ™ƒ

  • High Low Index gauges stock hitting highs and lows. 

High index = bullish market vibe, low index = time for caution. πŸ“ˆπŸ“‰ 

  • BPI measures the percentage of stocks flaunting bullish trends. 

High BPI = optimistic market, low BPI = watch out, it's possibly bearish.

Remember, diversity is key; using multiple indicators helps nail those trading decisions. Cheers to unlocking the market's whispers! πŸ₯‚

comment on this article
share this article
Photo of Sakshi Dhakre

An Article By -

Sakshi Dhakre

89 Posts

4.6m Views

469 Post Likes

Sakshi is an adventurous spirit who enjoys both the intellectual stimulation of Finance and the sensory experiences of good food and nature’s beauty. She has a passion for delving into complex financial topics and distilling them down into easy-to-understand insights. When she's not poring over financial reports, you might find her exploring a new corner of the city, trying out new restaurants and cuisines or admiring the beauty of the night sky.

Share your thoughts

We showed you ours, now you show us yours (opinions πŸ˜‰)

no comments on this article yet

Why not start a conversation?

Looks like nobody has said anything yet. Would you take this as an opportunity to start a discussion or a chat fight may be.

Under Investor's Psychology

"A few" articles ain't enough! Explore more under this category.

close
Share this post
share on facebook

Facebook

share on twitter

Twitter

share on whatsapp

Whatsapp

share on linkedin

Linkedin

Or copy the link to this post -

https://insider.finology.in/behavioral-finance/about-sentiment-analysis

copy url to this post
Copied