Key Takeaways

  • In our previous note on alternative data, we used Reddit to identify stocks that saw an uptick in their mentions coupled with unusual trading activity.
  • In this note, we create a social media-based sentiment indicator by focusing on the sentiment implied in individual Reddit comments.
  • For index-level products, like SPY, our sentiment measure is an effective short-term contra-indicator. When sentiment gets extremely negative, the market tends to perform best, and when social media trends are positive, the market tends to struggle.

Introduction – Using Reddit to Gauge Sentiment

Our previous note around alternative data focused on using Reddit data to identify stocks seeing unusual levels of attention [1]. We created the Reddit Alert list, which includes stocks with spikes in their mentions on WallStreetBets, coupled with an unusual pickup in trading activity or options activity. One area we did not study in our prior work was the sentiment of individual comments.

During the height of the frenzy around meme stocks in early 2021, little attention was being paid to the attitudes of the social media masses toward the overall market. While stocks like AMC and GameStop were seeing huge returns and thus were the focus of many of the financial news outlets, the gr...

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