Tapping into social media data to predict the market

Tapping into social media data to predict the market

26 February 2021
Tristan Murfitt, Senior Data Engineer

Quant researchers at SIGTech, the provider of next-gen quant trading technology, scraped data from Reddit’s WallStreetBets to build a successful investment strategy. The team used the SIGTech platform to analyse the Reddit data, deriving momentum and volatility predictions.

Retail Data Insights

Analysis of the data reveals the current most popular stocks, according to Reddit sentiment, are Aphria (APHA), Tilray (TLRY), Palantir (PLTR), GameStop (GME), and AMC Entertainment (AMC). Posts mentioning these stocks have achieved a combined total of more than 187,000 comments in the past 7 days on the WallStreetBets subreddit alone.

Using these insights, you can plot the popularity over time for the most well-acknowledged “meme stocks”, such as Blackberry, GameStop, Palantir, and Tesla. The chart below highlights how Reddit mentions have changed following the surge of interest in retail sentiment on global news networks.

Meme stocks on r/wallstreetbets

Plotted above, we see a significant drop in the stock sentiment on Reddit amidst the period where the GameStop share price fell from its January highs of $400 to its February lows of $40. However, the latter half of February has seen an uptick of the GME popularity again, this time appearing to be a leading indicator for the recent price rise which has seen GameStop shares reclaim the $100 price region.

The analysis of the data also revealed that, as a stock increases in mentions on Reddit, the price volatility also increases significantly over the next 21 business days. For the most popular stocks, with over 60 daily post mentions, the graph below shows that their price volatility increases on average by 200%.

Impact of popularity on 21 business day volatility


Receive our latest blogs, trading strategy ideas and insights

Long/Short Momentum Strategy on Popular Stocks

The strategy below exploits this prediction of increased volatility. It uses information from each stock’s popularity to trigger a short-term long/short momentum trade, while restricting the risk exposure.

The approach depends on a number of parameters, including a chosen measure of stock popularity, and window sizes for volatility and momentum. The following performance charts highlight the results of the strategy using a 16-day window for momentum, and opting for the number of daily posts as a measure of popularity.

Total Return for momentum strategy
Heatmap of monthly returns

Backtesting the strategy on the SIGTech platform reveals that it achieves an annualised return of 8.4%, with a Sharpe ratio of 1.48.

The team anticipates that single-stock options would also be a useful instrument to capitalise on each stock’s volatility.

We’d be excited to hear about your strategy ideas and are ready to put them to the test in our platform.

Email hello@sigtech.com to send us your trading ideas!