Review and Update of Reddit-Based Sentiment Indicator

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[1] based on aggregate sentiment toward the S&P 500.

Our indicator is based on the overall sentiment of Reddit users toward the S&P 500, and 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. Fig. 1 shows how the sentiment proxy has evolved over time.

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To evaluate the effectiveness of the sentiment indicator, we examine the subsequent market performance conditioned on the level of the sentiment indicator. When the sentiment indicator gives a low reading (below -1 in Fig. 1) there is more pessimism amon...

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