Six Months of SMLC

Six months ago, the CBOE in partnership with Social Market Analytics launched the first in a family of indexes derived from Social Market Analytics S-Factors.  Below is SMLC performance relative to the SPX.  For the first six months SMLC has generated 12.62% and the SPX has returned 4.64%.  In January, we launched SMLCW and it has outperformed as well.  We will be launching additional indexes this year with monthly and quarterly re-balances as well as indexes utilizing CBOE options contracts.  Please contact info@socialmarketanalytics.com for more information.

smlc-index

2016 In Review

Last year was a good year for SMA data.  High sentiment securities outperformed and low sentiment securities underperformed with good Sharpe’s and Sortino’s.  The below tables contain returns and Sharpe/Sortino ratios for the full history of Social Market Analytics S-Factor data.   Correlations to standard factors continue to be near zero. I’m sure our data can help in your investment process, contact us to learn more.
Five-year return summary:

returns2016

 Sharpe / Sortino

sharpes

Weekly, Monthly Quarterly Re-balance

As we move into a new year Social Market Analytics (SMA) has acquired five years of out-of-sample data.  This real history has enabled us to build signals for longer holding periods.   In this blog we will explore the use of SMA data for weekly, monthly and quarterly holding periods.

Portfolio managers often re-select securities for their portfolios at set re-balance periods.  These periods can be weekly, monthly quarterly, yearly….  As we accumulate history we are able to create factors with longer term statistical significance.  Longer term for SMA means monthly and quarterly.   For these longer holding period portfolios we created a three factor model using Raw-S, SV-Score and S-Buzz.  These factors look at sentiment, levels of volume relative to normal conversations for that security and relative to the entire universe.   Historical baselines for these securities have been extended to 50 and 200 days.  These three factors are combined into a multi-factor score and the top and bottom stocks are selected for long, short, and a theoretical long/short portfolio.  Returns of these theoretical portfolios are below.

Each portfolio is selected from a universe of the largest 450 stocks that trade options on the CBOE.  SPY is the benchmark in each chart.  As you can see each portfolio significantly outperforms the SPY.  Each chart shows returns.  Monthly and quarterly show the diversification benefit of sentiment data by displaying beta.

Weekly returns with and without transaction cost versus SPY.

weekly

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Quarterly Rebalance portfolio.

v9

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There is significant predictive power in sentiment data over longer holding periods.  SMA is unique in that we have been collecting this data for five years. Our data is free of survivorship and look ahead bias in the Tweets and universe.

For more information please contact SMA at ContactUs@SocialMarketAnalytics.com

SMA Signals for Monthly & Quarterly Holding Periods

Since our founding in 2012 we have been acquiring out-of-sample history to use in development of factor models.  We now have five years of history, with this history we can create statistically significant signals with monthly and quarterly holding periods.

This blog will explore the use of sentiment data for monthly and quarterly holding periods.  A trading system is explored by looking at exhaustion in social media measured by acceleration and velocity of sentiment as an indicator of price movements.  My next blog will look at traditional monthly and quarterly holding period performance based on a multi-factor sentiment model.

Acceleration and Velocity Trading System

Acceleration and velocity metrics can identify shifting sentiment.   To build these metrics, we created a new 50 period signal in addition to our traditional 20 day signal.  Raw-S is the net sentiment over a 24-hour look back period from a point of observation, derived from Tweets captured during the look back period. By aggregating over 50 periods, we create a 50-period Raw-S we call R50 as follows,

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For the purpose of this blog, we use 3:40 PM US Eastern Time factors to create the new metrics. At 3:40 PM US Eastern, a signal is generated near Market Close but with enough time to enter trades and execute at the Close. All trades reported in this paper are assumed to be executed at the Closing price of the day.

The R50 Factor is a raw 50 period sentiment measure.  To normalize the factor, we compute a standardized measure, using the following formula,

v2

where,

S50 is the Z-Score of R50

MA50 (R50) is 50-day moving average of the R50

SD50 (R50) is 50-day moving standard deviation of R50

S50 is a way to represent the R50 raw sentiment estimate on a standard normal curve.

 The New Metrics

We want to identify when the sentiment trend changes direction.  We derive new Velocity and Acceleration metrics from the S50 factor to identify changes in long-term sentiment and the rate of change of long-term sentiment.

We define V50, the velocity, as the one period change in S50,

v3

In our research, the velocity and the rate of change of velocity are equally important in identifying the exhaustion of a sentiment trend.

We call the rate of change of velocity, the acceleration, A50, (the second derivative of the S50),

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Building A Trading Strategy Using Velocity and Acceleration

We observed a mean reverting phenomenon with longer-term sentiment. A high positive peak in the S50 sentiment was typically followed by a decrease in price. Consequently, a local minimum of S50 was followed by price appreciation.

This is the foundation of the trading signals developed.

We used various portfolio sizes to test this trading strategy. Portfolios ranged from 20 highly followed stocks on Twitter to the full SMA equity universe.

Using the metrics defined above, we used the following entry and exit signals,

 

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Rational for using these signals is as follows:

  1. A mean reverting relation between S50 and Closing Price.
  2. We want to capture the change and rate of change rather than just the absolute level of sentiment.
  3. A V50 of 0.5 means a change in S50, of 0.5 standard deviations and A50 < 0 is deceleration, A50 > 0 is acceleration.
  4. Due to the mean reverting nature of S50, we wanted to enter when the sentiment was decelerating and had reduced by over 0.5 standard deviations in one day.
  5. We wanted to exit when the sentiment was accelerating and had already increased by 0.5 standard deviations.

 

This was a successful trading strategy across all universes selected.  Below are performance statistics for various universe sets.  20 liquid stock portfolio universe is a universe of stocks that are highly followed on Twitter.  100 liquid stock universe is a universe of 100 stocks that are highly followed on Twitter.  Top 1000 mkt. cap and universe are self-explanatory.

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This data is statistically significant, out of sample, and reproducible.  To learn more about the possibilities of sentiment data in your model please contact SMA at ContactUs@SocialMarketAnalytics.com.

Thanks,

Joe

 

SMLC Performance Since Launch

Since SMLC launched six weeks ago there has been a significant increase in volatility.  I thought it would be interesting to see how SMLC has performed during this period of increased volatility.  The chart below shows the cumulative return of SMLC versus the S&P500 over the same period.   Factors derived from the rigorous cleansing and analysis of social media data can provide an edge in the market even during periods of increased volatility.  SMLC is composed of the highest S-Score stocks from the CBOE Large Cap Universe prior to market open.   To learn more about SMLC or the SMA S-Factors please contact Social Market Analytics.  SMLC is up 4.35 percent since inception and the SP is down 1.73 percent over the same period.

smlc

CBOE & SMA Weekly Sentiment Index

As regular SMA blog readers know we recently launched our first index with the CBOE.  The initial index (SMLC) is a daily rebalance portfolio based on the highest sentiment securities in the CBOE large cap universe.  Each morning we build a portfolio of the 25 highest sentiment securities and hold that portfolio to Close.   Back test and live performance have demonstrated the predictive power of sentiment data of a five-year period.

SMA and CBOE researchers have been working on multiple indexes, the next index (SMLCW) is a weekly rebalance portfolio based on the average sentiment of stocks during the week as measure on Friday mornings prior to the Open.  By averaging S-Scores, you generate a longer signal.  The subsequent portfolio is held for a week. The white line is portfolio performance post transaction cost.  As you can see from the chart the impact of transaction cost is minimal.

weeklychart

To learn about SMLCW or how rigoursly defined sentiment factors can help in your investment process please contact us.

Regards,

Joe

CBOE SMA Large Cap Index

On July 29th CBOE and SMA launched the CBOE SMA Large Cap Index (SMLCSM) which tracks the return of a hypothetical portfolio strategy based on Social Market Analytics (SMA) S-Scores.  The SMLC portfolio is an equal pct. weighted portfolio of the 25 highest S-Score stocks in the CBOE Large Cap Universe.  Stocks in the CBOE Large Cap Universe are in the top 15% capitalization tranche of stocks that are the underlying for options listed on the CBOE (approximately 3000) and have a market capitalization greater than or equal to $10 billion.

This is the first in what will be a family of indexes based on combined CBOE and SMA expertise.  The next index will be a weekly rebalanced index based on average S-Score over a lookback period.  Sector, Industry, Market Cap banded, and overlay indexes are likely to follow.

In the three weeks since the index launched I have had a number of inquiries as to performance.  It has performed as expected from the back test.  It has outperformed the SP500 over this time period.  SMLC return is represented by the green line, SP500 is represented by the black line.  We would be happy to design custom indexes. Please contact us with any questions: contactus@socialmarketanalytics.com

SMLC

Regards,

Joe Gits