This morning, Dow Jones will release the first instance of its new Economic Sentiment Indicator (ESI), an economic indicator based on language patterns in news media. I've heard of several strategies for finding investment intelligence in media content, but this is the first I can recall that aims to predict the performance of the overall economy. Naturally, it reminded me of earlier discussions of which media metrics might be useful as economic tea leaves.
The math behind DJ's ESI is astoundingly simple—"a ratio between the number of appearances of the word recession (and some synonyms) and the number of appearances of the word recovery (and some synonyms)"—yet the company says it is a reliable, leading indicator of economic performance.
Predicting market moves
If a simple sentiment test based on a few numbers can predict the economy, what does it take to predict the performance of specific investments? I've heard of a few approaches at real companies. Naurally, what works and what doesn't work is somebody's trade secret, but here are some things they're trying:
- Volume of discussion
More talk means something. I've heard of hedge-fund experiments with this simple indicator.
- Sentiment analysis of discussion
Take the PR-research metrics and look for correlations with stock prices. Think about mining targeted communities versus the entire social media world.
- Sentiment analysis of influencers
Ignore the crowd and focus on quotes and public statements of executives, analysts, and others with specialized knowledge of the company.
- Discovery of little-known facts
Apply technology to read the impossible volume of daily information that may reveal—or hint at—a valuable fact. Keep your text analytics busy with securities filings, patent filings, court records and anything else that might hold material information. It's amazing how much is online now.
What else can it do?
If you think about the information generated by most social media analysis companies, it's not hard to imagine looking at the dashboards or reports with an investor's eye. Both quantitative and qualitative views can tell useful stories. If you're the communications person, you might try comparing your media metrics with your company's stock price, in addition to financial metrics. Wouldn't that be an interesting chart to have in your back pocket?
You might try thinking of how SMA might benefit other functional areas, too. Certainly, vendors I'm hearing from are applying similar techniques outside of marketing and communications. Apply a little rocket science and consider that the value of this information might show up somewhere other than where everyone is looking. It's way too interesting to stay in a sandbox for long.