In the old days of Wall Street, in order to figure out the market sentiment around an individual stock or a sector, investors and brokers had to rely on general notions formed from gut feelings and daily conversations.
Now, as conversations move into the digital space, innovative companies are figuring out ways to use AI to predict trends in the market.
Narrative Investing is one of them. An early-stage startup, the company is trying to combine the “good old fashioned gut feeling” with machine learning models to come up with a bird’s-eye view of market trends.
By using AI models and natural language processing, the Netherlands-based tech platform built a tool that can analyze market trends by drawing public data from Twitter, Reddit and a host of other social networks including blogs, forums and financial media outlets in an effort to predict changes in price action.
The Power of Analyzing Narratives
Investors have several tools on hand to help them predict market movements and changes in stock prices.
Narrative Investing founder John de Boer says that narratives can have a big impact on the financial markets.
“What you see in the news not only reflects what you're seeing in financial markets, it can also drive financial markets,” de Boer said in a phone interview with Benzinga.
A few years ago, de Boer started working on a tool that aims to quantify narratives around the financial markets.
His experiences working in the asset management industry intersected with Nobel laureate economist Robert J. Shiller’s ideas around the economic impact of narratives and stories.
Narrative Investing’s tool looks at large, unstructured data from the Internet, to see if certain emotions exhibit a trend over time. Using a system that assigns weight values on the information, depending on the source - Twitter, Reddit and financial media outlets - the tool then assesses the most weighted information based on its public reach, explained de Boer.
“[The tool] looks at a large data set, with chatter on all financial topics and it goes to look for: ‘okay, for a certain topic or for a certain emotion, do I see an increase in attention or an increase in sentiment over time?’”
Predicting The COVID Crash
A first test drive of the tool was able to successfully predict the COVID market crash of 2020.
“We saw already that there was an increasing amount of fear in financial chatter and in financial narratives pre the covid dip,” de Boer said.
The graph below shows how the tool picked up a sense of fear from Twitter, Reddit and news headlines. The negative expressions shown in black are inversely proportional to the movements of the S&P 500 Index.
Picture courtesy of Narrative Investing.
Looking At Specific Niche Markets For Exponential Growth
De Boer decided to aim the tool at specific sectors with large growth potential.
“When you start viewing financial markets through the narrative lens, you can also attune it to, for example, trends in investing.”
“I looked at some sectors which are not that big in financial markets, but they’re sort of a lottery ticket,” de Boer said.
These are small sectors that will either stay small or grow exponentially if their underlying thesis is proven to work and they “catch a wave,” such as what happened in the crypto market boom of early 2021, he explained.
“There's an old saying in financial markets that you only make money if the market starts agreeing with you.”
Using his tool, de Boer believes investors can see if the markets are starting to agree with their investing ideas.
Having gathered three to four years of data, de Boer is starting to work on machine learning models that can help predict data from his analysis tool. But for now, he expects the charts can offer an intuitive view at how narratives evolve over time and how they relate to future movements in price action.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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