Financial Sentiment Analysis
How Federal Open Market Committee Sentiment Could Predict the Next Major Market Crash. It is not a question of if, but when, the next market correction or crash will happen. The Federal Reserve (“Fed”)’s quantitative easing policy is propping up the stock market. How the markets will react when the Fed unwinds its balance sheet and raises interest rates is of particular interest to hedge funds. Hedge funds are shorting the VIX, an index fund measuring market volatility, more than they ever have before. Many parallels have been drawn to the 1987 stock market crash and The Great Recession of 2008, when investors also believed volatility would not explode. Market prediction analytics can help hedge funds preserve wealth by predicting the next stock market crash. Hedge funds could hedge their bets on the bull market with bets of an upcoming bear market, which will start with a spike in volatility.
Sentiment Analysis Stratifyd analyzed 237 documents including FOMC statements and minutes, news articles, Federal Reserve statistics, and market price histories between 2007 to 2017. We applied the uncertain, positive, and negative sentiment lexicons and stop word lists for financial sentiment analysis. We also applied a term frequency-inverse document frequency (“tf-idf”) weighting mechanism in order to generate more accurate measures of word impact. The FOMC’s negative and uncertain sentiments towards the stock market and U.S. economy are of particular interest.
“The fact that everyone has been incentivized to be short volatility has set up this reflexive stability — a false peace, but if we have some sort of shock to the system, all these self-reflexive elements reverse in the other direction and become destabilizing as opposed to stabilizing.” Christopher Cole, Managing Partner at Artemis Capital
Negativity vs. Uncertainty The percentage of negative and uncertain word frequencies in FOMC minutes have an inverse relationship (r = -0.50). Uncertainty peaked a year before the Recession and nearly two years before negativity reached its peak at the height of the Recession in October 2008. Negativity is positively correlated to the VIX price history (r = +0.46), suggesting that market volatility is sensitive to negative monetary policy outlook. The uncertainty percentage of FOMC minutes could potentially be used as a predictor of market volatility. News Sentiment for the month of September 2017 has an average combined uncertainty and negativity sentiment score of -0.92. Top N-grams include “financial crisis” (-0.91) and “mortgage backed security” (-0.95), suggesting that analysts are uncertain of how the Fed will raise interest rates and unwind its balance sheet without harming the U.S. stock market. Uncertainty is rising in recent months and diverging from negativity, a pattern observed prior to the 2008 financial collapse. Investors can use this data to hedge their portfolios by going long on the VIX fund; anticipating that it will spike in the future. Liquidating investments into cash at the current height of the bull market may be the best strategy. Market downturns present a unique opportunity to buy stocks at very low prices and hold them throughout a market recovery for extraordinary gains.
Conclusion Planning for the next financial downturn, stock market correction, or economic recession can save investors millions of dollars. Sentiment analytics are increasingly being used by hedge funds to execute trading strategies. Hedge funds that utilize sentiment analytics consistently outperform their peers. Hedge funds can use Stratifyd to gain predictive power over the market. Stratifyd’s platform provides sentiment analytics with powerful insights for trading strategies, allowing for lightning speed market intelligence to make effective trading decisions.
Who Is Stratifyd Stratifyd, established in 2015, has quickly become a leader in data science and big data analytics. By enabling key business lines - including marketing, customer experience, HR, and research analytics - the Stratifyd platform excels in speed, accuracy, and usability. Stratifyd designed its platform from the ground up to diverge from existing analytic and visualizations tools. The enterprise solution handles data ingestion to data visualization, specializing in unstructured text analytics using unsupervised machine learning for NLP. Stratifyd’s approach eliminates human bias, which increases accuracy in the rapidly changing marketplace, and allows for insights in minutes. The unstructured data visualization is enhanced by fusing structured data into a single platform wherein each LOB can report, confirm, and track insights. With over 80 pre-built data connectors, Stratifyd is expanding across multiple verticals and roles; emerging at the center of the insights revolution. For More Information please contact us at
[email protected] 704-215-4955