Long Term Twitter Sentiment for Market Outperformance: Monthly Strategy

At Context Analytics, we lead the way in leveraging Twitter sentiment to uncover actionable market signals, both short-term and long-term. Our proprietary S-Factor Feed enables traders and investors to engineer signals that consistently outperform the market. In this blog, we explore a Monthly Long-Only Strategy based on Raw-S Factor, showcasing its ability to deliver superior returns compared to the S&P 500 index.

Introducing the Metric: Monthly Weighted Sentiment

The Monthly Weighted Sentiment metric is a refined signal designed to capture the long-term trends of sentiment on Twitter. It is calculated as follows:

1. Raw-S Factor:
   • Aggregates the sentiment of Tweets from the past 24 hours.
2. Monthly Aggregation:
   • Applies exponential weighting (λ = 0.9) to give more prominence to recent Tweets while still incorporating earlier sentiment. This exponentially weighted score is referred to as w_raws
   • The w_raws values are summed over the entire month for each security, resulting in the Monthly Weighted Sentiment.

This metric ensures a robust reflection of market sentiment, emphasizing recent trends while accounting for the sentiment's persistence throughout the month.

The Trading Strategy

Using the Monthly Weighted Sentiment, we developed a Monthly Long-Only Strategy from S&P 500 constituents:

1. Security Selection:
   • At the end of each month, the Top 200 securities with the highest Monthly Weighted Sentiment are selected.
2. Weighting:
   • These securities are weighted by Market Capitalization to construct the portfolio.
3. Trade Execution:
   • Positions are entered and exited using the Market on Close (MOC) price on the fourth market day of each month.

Performance Analysis

Since the start of 2018, this strategy has consistently outperformed the S&P 500 index, demonstrating the predictive power of our sentiment-based metric:

• Higher Returns:
  • Achieved an ~3% increase in annualized returns compared to the S&P 500 index.
• Improved Risk-Adjusted Metrics:
  • Enhanced Sharpe and Sortino Ratios, indicating better returns relative to risk.

These results highlight the ability of sentiment data to provide a competitive edge in long-term investment strategies.

Why Monthly Sentiment Matters

Market sentiment is a critical driver of asset prices, and Twitter has become an invaluable real-time barometer of investor sentiment. By aggregating and weighting this sentiment over time, the Monthly Weighted Sentiment captures both the intensity and recency of market sentiment, offering a predictive edge for trading.

Unlocking New Possibilities with Context Analytics

The Monthly Long-Only Strategy highlights the potential of sentiment-driven investing to enhance trading strategies. At Context Analytics, we focus on developing practical tools that leverage unstructured data to support informed decision-making.

To learn more about our S-Factor Feed and other data-driven solutions, visit contextanalytics-ai.com.