We have built a proprietary database of comments from the WallStreetBets sub-reddit extending back over two years. In this research note, we update our short-term market indicator based on aggregate sentiment toward the S&P 500.
The short-term market indicator proxies for retail sentiment in the market. It has shown to be an effective contra-signal over short-term holding periods. We construct the indicator by assigning a sentiment score to each comment about the S&P 500, then aggregating those sentiment scores at a daily frequency. When the sentiment indicator gives a low reading (below -1 in Fig. 1) there is more pessimism among Reddit users. When readings are high (above +1 in Fig. 1), Redditors are generally more sanguine about the market. Fig. 1 shows that most recently, the sentiment proxy has reflected optimism among Reddit users.
Fig. 2 shows the subsequent 5-day return of the SPDR S&P 500 ETF Trust (ticker SPY) as a function of the sentiment indicator. The market has performed best following periods of negative sentiment. Specifically, in the 5 days following a negative sentiment reading, the market returns 0.8% on average. On the other hand, the market tends to decline following a positive reading in the sentiment – on average, the market falls by 0.3% in the 5 days following a positive sentiment reading. Currently, the sentiment indicator remains near the top of its range. As a result, we may see a minor correction in the market over the next week.
In this research note, we update our Reddit-based sentiment proxy for the market. Currently, the sentiment indicator reflects optimism among Reddit users toward the market. As the sentiment indicator acts as a contra-indicator for the market, this positive reading would indicate an increased likelihood for a minor correction in the market over the next week.
 Alternative Data: Sentiment from Social Media