Tracking Fear Cycles in Markets · Media Monitoring Reconciling Underreaction and Overreaction 07...

Tracking Fear Cycles in MarketsPutting the Coronavirus Infodemic in Context

MarketPsych Data LLCRichard L Peterson, M.D.March 10, 2020

INVESTING THROUGH AN INFODEMIC

TRACKING CONTAGION IN REAL-TIME

OVERVIEW

Minds: Behavioral economics

Humans are systematically non-rational with information about risk.

Markets: Manias, Panics, Cycles

Prices overreact (revert) and underreact (trend) depending on information flow.

Models: Systematic PredictionCreating predictive models influenced by market perceptions.

Media: Sentiment Analysis

Risk perceptions and information flow can be quantified in media.

“When all are bearish, there is cause for prices to rise.“

~ Munehisa Honma, 1755, 三猿金泉秘録, The Fountain of Gold - The Three Monkey Record of Money.

AGENDA

Media Monitoring

Reconciling Underreaction and Overreaction

07

45

18 The Information Cycle in MarketsUnderreaction & MomentumTurning PointsOverreaction & Reversals

41Q&A

EpidemicsSARS / Swine Flu / EbolaCoVid-19

27

AGENDA

Media Monitoring

Reconciling Underreaction and Overreaction

07

45

18 The Information Cycle in MarketsUnderreaction & MomentumTurning PointsOverreaction & Reversals

41Q&A

EpidemicsSARS / Swine Flu / EbolaCoVid-19

27

ABOUT

20102007 2016

Doing NLP media analysis since 2004. Partnered with Reuters/Refinitiv in 2011.

BOOKS & RESEARCH DATA

FEAR IN THE FINANCIAL MEDIA

• To the right is an analysis of the phrase: “South Koreans diagnosed with viral pneumonia.”

• Locations such as South Korea and Topics such as Human Infectious Diseases are counted.

MEASURING EMOTIONS AND TOPICS IN MEDIA

• Our language analytics process covers hundreds of topics.

• To the right is an analysis of the sentence: “U.S. stocks tumble again as fears of coronavirus grip markets.”

• Emotions such as Fear and sentiments like Negative are extracted.

AGGREGATE SCORES INTO SENTIMENT INDEXES

• Sentiment indexes published over time. Derived globally from 2,000 news and 800 social media sources.

• Separate news and social feeds.

• Streaming media sentiment for: 187 countries15,000+ global companies 62 stock indexes 62 sovereign bonds 45 currencies36 commodities 150 cryptocurrencies

• History from 1998-present.

• Highly dimensional: Emotions and complex themes measured.

• Minutely (60-second), hourly, and daily feeds available.

• Customers from pension funds to low latency traders in 20+ countries.

MULTI-DIMENSIONAL SENTIMENTS & TOPICSSovereign

Assets CurrenciesCommodities Equities Countries

Shared Fields: Sentiment, Optimism, Fear, Stress, Surprise, Anger, Gloom, Joy, LoveHate, Trust, Conflict, Urgency, Uncertainty, EmotionVsFact

AcreageCultivatedAgDiseaseAgStressConsumptionVolumeLongShortLongShortForecastNewExplorationPriceDirectionPriceForecastProductionVolumeRegulatoryIssuesSafetyAccidentSubsidiesSubsidiesSentimentSupplyVsDemandSupplyVsDemandForecastWeatherDamage…

CarryTradeCurrencyPegInstabilityLongShortLongShortForecastPriceDirectionPriceForecastPriceMomentum

AgriculturalStressBudgetDeficitConsumerSentimentCreditConditionsEconomicGrowthEconomicUncertaintyFinancialSystemInstabilityFiscalPolicyLooseVsTightGovernmentCorruptionGovernmentInstabilityHumanInfectiousDiseaseInfratructureSentimentInflationInflationForecastInvestmentFlowsMarketRiskNaturalDisastersSocialInequalitySocialUnrestTerrorismTradeBalanceUnemployment…

BondBuzzBondSentimentBondOptimismBondTrustBondUncertaintyBondDefault…StockIndexBuzzStockIndexSentimentStockIndexOptimismStockIndexTrustStockIndexUncertainty…RatesBuzzCentralBankDebtDefaultsInterestRateInterestRateForecastMonetaryPolicyLseTigt

AnalystRatingDebtDefaultEarningsForecastFundamentalStrengthInnovationLaborDisputeLayoffsLitigationLongShortLongShortForecastManagementChangeManagementTrustMarketRiskMergersPriceDirectionPriceForecastVolatility…

Crypto-currencies

AnonymityAttackCodeSentimentCodeUpgradeCriminalActivityDeveloperSentimentFOMOForkForkForecastHodlLitigationMajorityAttackNoobsRegulatoryCrackdownRegulatoryIssuesScamTransactionSpeedVolatilityVulnerability…

SAMPLE OUTPUT FOR COUNTRIES

This is the 2-digit ISO code (Reuters topic code) for each country.

This is a sample of RMI indices for each country. The 60+ country indices cover such themes as

natural disasters (infectious disease), economic and geopolitical events, and emotions.

These are the values of the indices. Some indices like Sentiment range from -1 à 1. Others like Fear range from 0 à 1. The value is the percentage of all references to the

country (buzz) containing this theme.

The Khashoggi assassination at the Saudi Arabian (SA) embassy in Turkey

(TR) led to comparatively high violentCrime scores for each country.

Separate data feeds delivered from news and social media. A combined feed called

News_Social is also available (not displayed).

ECONOMIC GROWTH RMI INDEX: MAR 8 - 10, 2020

HUMAN INFECTIOUS DISEASE RMI INDEX: MAR 1 - 10, 2020

ACADEMIC SENTIMENT RESEARCH SUGGESTS VALUE IN THIS APPROACH

• 35+ academic papers and a dozen dissertations.

• Publications in top tier finance journals including Journal of Portfolio Management, Journal of Financial Economics, and Quantitative Finance.

AGENDA

Media Monitoring

Reconciling Underreaction and Overreaction

07

45

18 The Information Cycle in MarketsUnderreaction & MomentumTurning PointsOverreaction & Reversals

41Q&A

EpidemicsSARS / Swine Flu / EbolaCoVid-19

27

THE INFORMATION CYCLE IN MARKETS

(1)Underreaction (Momentum)

Rebound

(2) Turning Point (Risk-Off)

(3) Overreaction (Panic)

(1) UNDERREACTIONSTOCKS FOLLOW THE NEWS SENTIMENTThis study examined the performance of US stocks over the period 2006-2018, decile-ranked by their sentiment average on days {-30,0}. The sentiment ranks were tracked over their subsequent 90-day returns. Their decile performance is plotted.Going forward, the most negative stocks by sentiment rank (red lines) are also the worst price performers. The 90-day spread is actionable. Such sentiment momentum is seen globally, is present from weeks to years, has value independent of traditional factors.Does this mean we should sell stocks due to CoVid-19?

(2) MEDIA TURNS NEGATIVE BEFORE PRICESAPPLE: Sep 2018 – Feb 2020. Apple Sentiment Fell Sharply in Jan 2020, before the Price Fell (Underreaction).

(2) GO RISK-OFF WHEN SENTIMENT TURNS DOWNS&P 500 CORRECTIONS, JAN 2019 – FEB 2020

(2) CRUDE OIL SENTIMENT, JAN - MAR 2020

“[T]ry to be fearful when others are greedy and greedy when others are fearful.”

~ Warren Buffett

“When all are bearish, there is cause for prices to rise.“

~ Munehisa Honma, 1755.

USE CASE #3 BUYING ON OVERREACTIONBuying on Fear is Practiced by the Wealthiest Investors in History

BUYING ON FEAR IS A DATA-DRIVEN STRATEGYOur Fund (MarketPsy) Bought American Airlines On Swine Flu Fear in 2009

1. Swine Flu provided a test of Buffett’s advice in this trade our hedge fund made.

2. Apr 25 2009: WHO director declares “public health emergency” regarding the “Swine Flu”.

3. Anxiety rises in AMR online stock message boards about reduced travel (see grey line).

4. Apr 27 2009: WHO pandemic alert level to Phase 4.

5. Apr 30 2009: MarketPsy bought AMR at $4.81/share.

6. May 6 2009: MarketPsy sold AMR at $5.95/share.

7. But it’s not easy…PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. There can be no assurance that any investment program or fund described herein will achieve its objectives.

AGENDA

Media Monitoring

Reconciling Underreaction and Overreaction

07

45

18 The Information Cycle in MarketsUnderreaction & MomentumTurning PointsOverreaction & Reversals

41Q&A

EpidemicsSARS / Swine Flu / EbolaCoVid-19

27

RCENT EPIDEMICS REDUCING TRAVEL

SARS

Ebola

Coronavirus

2003

2020

2009 Swine Flu

2014

RCENT EPIDEMICS REDUCING TRAVEL

SARS

Ebola

Coronavirus

2003

2020

2009 Swine Flu

2014

EBOLA OUTBREAK IN 2014• The light blue line represents

the value of Cathay Pacific Airways stock.

• Yellow columns along the midline are the frequency of references to Human Infectious Diseases (SARS) in the media about Hong Kong.

• The red shading represents when those references are more than 1% of all references in the news about Hong Kong.

• Note that the Hang Seng (HSI) and the S&P 500 hit highs two months following the bottom.

• The lower subplots depict Hong Kong Fear and Sentiment moving averages.

Chart Source: Tiago Teodoro PhD

Buy Signal?

Sell Signal

RCENT EPIDEMICS REDUCING TRAVEL

SARS

Ebola

Coronavirus

2003

2020

2009 Swine Flu

2014

Chart Source: Tiago Teodoro PhD

• The light blue line represents the average equally-weighted value of Continental, Southwest, and United Airlines stocks.

• Columns along the midline are the frequency of references to Human Infectious Diseases (Swine Flu) in the media about Mexico (yellow, MX) and the US (orange, US).

• The red shading represents when those references are more than 1% of all references in the news about Mexico.

• Note that the rising crude oil price (+30%) may have prevented an airlines price recovery.

• Sentiment and Fear averages for the US are plotted below.

Buy Signal?

Sell Signal

RCENT EPIDEMICS REDUCING TRAVEL

SARS

Ebola

Coronavirus

2003

2020

2009 Swine Flu

2014

• The light blue line represents the value of the Airlines ETF (FAA).

• Yellow bars along the bottom are the frequency of references to human infectious diseases (Ebola) in the media. about the US.

• The red shading represents when those references are more than 1% of all references in the news about the U.S.

• When the first U.S. case of Ebola was reported, Airline shares dropped dramatically and then quickly rebounded, with the rebound propelled in part by the declining oil price.

• The lower subplots depict Airline Fear and Sentiment moving averages.

Chart Source: Tiago Teodoro PhD

Buy Signal?

Sell Signal

EPIDEMICS REDUCING TRAVEL

SARS

Ebola

Coronavirus

2003

2020

2009 Swine Flu

2014

Chart Source: Tiago Teodoro PhD

• The light blue line represents the value of Japan Airlines stock through Mar 4, 2020.

• Yellow bars along the bottom are the frequency of references to human infectious diseases in the media about Japan.

• The lower subplots depict Japanese Fear and Sentiment moving averages.

JAPAN AIRLINES

Sell Signal

Chart Source: Tiago Teodoro PhD

• The light blue line represents the value of Cathay Pacific stock through Mar 4, 2020.

• Yellow bars along the bottom are the frequency of references to human infectious diseases in the media about Hong Kong.

• The lower subplots depict Hong Kong Fear and Sentiment moving averages.

CATHAY PACIFIC AIRWAYS

Sell Signal

• The light blue line represents the value of Korean Air stock through Mar 4, 2020.

• Yellow bars along the bottom are the frequency of references to human infectious diseases in the media about South Korea.

• The lower subplots depict Korean Fear and Sentiment moving averages.

Chart Source: Tiago Teodoro PhD

KOREAN AIR LINES

Sell Signal

Chart Source: Tiago Teodoro PhD

• The light blue line represents the value of China Southern Airlines stock through Mar 4, 2020.

• Yellow bars along the bottom are the frequency of references to human infectious diseases in the media about China.

• The lower subplots depict Chinese Fear and Sentiment moving averages.

CHINA SOUTHERN AIRLINES

Sell Signal

Chart Source: Tiago Teodoro PhD

• The light blue line represents the value of Delta Airlines stock through Mar 4, 2020.

• Yellow bars along the bottom are the frequency of references to human infectious diseases in the media about the US.

• The lower subplots depict Chinese Fear and Sentiment moving averages.

DELTA AIRLINES

Sell Signal

AGENDA

Media Monitoring

Reconciling Underreaction and Overreaction

07

45

18 The Information Cycle in MarketsUnderreaction & MomentumTurning PointsOverreaction & Reversals

40Q&A

EpidemicsSARS / Swine Flu / EbolaCoVid-19

27

THE INFORMATION CYCLE IN MARKETS

(1)Underreaction (Momentum)

Rebound

(2) Turning Point (Risk-Off)

(3) Overreaction (Panic)

INFORMATION CYCLES• Media tone contributes to collective cognitive

biases and herd behavior: can create an “Infodemic” via attention and feedback loops.

• Markets are not simple: Initially humans underreact to threatening information (denial).

• Rising fear and declining sentiment in the media predict market prices will fall further.

• Waves of panic (overreaction) and bounce punctuate prices. Bounces usually occur over a 4 to 5 day duration.

• When the rate of new tangible bad news slows, a sustained decline in fear and an improvement in sentiment accompany a long-term rebound in prices.

• Visualization helps understand the progression of information contagion.

• Please contact your Refinitiv account manager for a free data trial and access to our onlinevisualization tools and quant research.

• Or reach out to info@marketpsychdata.com with questions or comments.

And please be careful out there!We wish you a healthy and happy Spring 2020.

• WEB: Johns Hopkins global CoVid-19 map.• WEB: CoVid-19 Live Updates. New York Times.• WEB: Mark DeCambre. Feb 24, 2020. “How the stock market

has performed during past viral outbreaks, as coronavirus spreads to Italy and Iran.” MarketWatch.com.

RESOURCES