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Sentiment Reversals as Buy Signals

Published Date: February 1, 2010
Author: John Kittrell - Knightsbridge Asset Management, LLC

Brief:

The study provides insights into a methodology for selecting stocks that emerge from a period of media pessimism with good forward 1-year excess return potential.

Abstract:

This paper presents how a company-specific metric of net news sentiment is defined and shown to predict long-term positive excess stock returns. A sequence of news stories about a company induces a sequence of sentiment measurements (positive or negative relative to the company), and when significant movements of such sequences from negative to positive are treated as buy signals, the universe of stocks so defined outperforms the S&P 500 index over a one year time horizon. If the metric is further refined to incorporate extended periods of news coverage, excess returns are improved. However, the event frequency and subsequent outperformance of such sentiment reversals are sensitive to market environments.

   
 

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