How Twitter is used to track social mood and markets

Dr. Johan Bollen on Twitter, Mood and Socionomics

by Jill Noble | February 16, 2012

In the world of algorithm-based investing, you can
hardly throw a stick these days without hitting someone
who's incorporating social media data in their trading
method.

Traders seem convinced that social chatter from a
specific group or about a specific event (like a new
Apple product or changing Netflix service) can be a
predictor of where stocks are headed. Yet it was more
than a year ago when Indiana University's Johan Bollen
found that his team's Twitter sentiment analysis predicts
changes in the market with 87.6 percent accuracy.

What makes Bollen's work particularly notable is that
it challenges the assumption of fundamental analysis
that the news drives the markets: in fact, his
work suggests that collective social mood leads the
DJIA closing values by a few days' time.

Robert Prechter's socionomic hypothesis stipulates
that aggregate social mood is patterned, and in turn
drives social activities (including the markets). It
was more than three decades ago when Prechter observed
that trends in the Dow Industrials and other financial
markets directly reflect the optimism and pessimism
of social mood.

In an interview last spring, Johan Bollen agreed:

Well, I mean, the scale of it: the number of investors
and the speed at which they make decisions is tremendous.
So you really have a good indicator of the public
sentiment towards investing right there in the market.

The most surprising thing is that [market movement]
is apparently tied into pretty non-market-related
shifts in the public mood - right? Because we've
actually measured public mood states for all tweets.
We haven't actually limited that to those submitted
by traders or anything like that.

... The research compelled us because all the people
thought it would be the news.... But I can definitely
say that (Twitter mood) seems to predict the markets,
and so that highly suggests some kind of causal mechanism
that we don't understand yet.

Listen to the entire interview here.

Bollen's willingness to follow the data wherever it
goes produced a result which challenges the traditional
view that the economy drives social mood - and led
him to consider socionomic theory as a viable explanation
for the correlation between mood as expressed on Twitter
and the stock market's performance.

He and his colleague Huina Mao (interview coming in
early March) will be back at the 2012
Socionomics Summit for an encore presentation.

Seats for the April 14 Socionomics Summit: New Initiatives
in Social Mood Research and Application in Atlanta
are selling fast. Last year's inaugural event sold
out.

Don't miss your chance to hear from Dr. Bollen and
an impressive list of additional presenters, including
Bob Prechter - Reserve
your seat now and save $50>>

This article is syndicated by The Socionomist, a publication of the Socionomics Institute, and was originally published under the headline Dr. Johan Bollen on Twitter, Mood and Socionomics. The Socionomist is designed to help readers understand and anticipate waves of social mood. Copyright © 2012 Socionomics Institute.

PERSONAL DJIA CHART UPDATE: 3_26_12

The $DJI has certainly gone much higher than I expected it would.

My mistake was counting the B wave as the first  wave of the primary bear market [C] wave (chart coming soon)

My adjusted counting, now qualifies the peak at the end of October as the completion of intermediate wave A and the subsequent decline, ending in late November, as wave B. From that point forward the market has been in the midst of a powerfully unfolding C wave of intermediate degree, which as may be seen on the attached chart as a five wave structure. Within this structure was a very long third wave extension.

As a result, minor wave 1 of intermediate wave C, will tend to be similar in amplitude to minor wave 5 of intermediate wave C. However, I am looking more closely at the fact that this intermediate C wave is, at the close of the market today 87 points away from $13,329.54, which equals 1.618 x (length of wave A).

This next prediction is, as a result, very short term. I believe the market will move up roughly another 87 points before completing wave 5 of minor degree and wave C of primary degree. If the price level moves past this point, my next closest guess would be that the market would go to $13,759. Though I doubt it will reach this point, this C wave has surprised me before.

Prediction: DJIA at $13,329 before return of Bear market
Secondary Prediction: DJIA at $13,759 before return of Bear market.

All the best,

Warren