Tools Help Investors Wade Through All the Chatter on Twitter; They filter tweets and help investors draw conclusions about where the market is headed

Tools Help Investors Wade Through All the Chatter on Twitter

They filter tweets and help investors draw conclusions about where the market is headed

GEORGIA WELLS

Dec. 15, 2013 4:00 p.m. ET

Most investors would love it if they could see into the future. Now, some of them are convinced they can—by monitoring Twitter. TWTR -1.67% A growing number of individual investors believe the microblogging service—which has already proved to be a good source for breaking news, insights from Wall Street’s top minds and major corporate announcements—holds a treasure trove of information that can lead them to the next hot stock.The idea is that by tracking conversations around companies, industries and the overall economy, investors can predict in which direction a certain stock or the overall market is headed.

The problem is, with as many as 400 million tweets and counting sent daily—not to mention the fake news releases, misinformation and bad ideas that are routinely published—Twitter postings can be difficult for investors to harness. In a classic example of what can go wrong, when Twitter recently announced plans to go public via a tweet, shares of the similarly sounding Tweeter Home Entertainment soared some 1800%, as confused investors snapped up shares of the bankrupt company.

That’s where companies like MarketPsych LLC come in. The Westport, Conn., research firm and several other companies have developed sophisticated analytical tools that investors can use to filter stock-related tweets and draw conclusions based on the buzz. Here is a look at some of them:

Zeroing In on ‘Influencers’

Chicago startup Social Market Analytics LLC has created an algorithm that scans tweets for words that indicate sentiment around a stock—things like support and resistance levels or the outlook for one of the company’s products. The firm then uses this data to score how the chatter around a particular stock is changing. SMA, which delivers its information via email reports, alerts and a data feed that can be integrated with Excel, tracks tweets only from people who are considered to be market “influencers”—such as active traders with a history of making good calls. As Chief Executive Joe Gits puts it: “On social media, it isn’t just what’s being said, it’s who’s saying it.”

Enlarge Image

Mr. Gits says filtering for tweets from market influencers creates a very different signal than the straight Twitter stream: While the sentiment from the overall Twitter feed for a particular stock may be bearish, an analysis of the accounts of market experts might yield a bullish signal, or vice versa.

The company’s cheapest product includes a daily email report of those stocks ranking highest and lowest in sentiment, which Mr. Gits says may be useful for investors who want to uncover companies that aren’t being mentioned in traditional news sources but are popping up in tweets.

The New York Stock Exchange is a distributor of the service.

Gauging Sentiment

Market Prophit LLC uses natural-language processing software to track tweets about individual stocks that include ticker symbols, such as $AAPL for Apple Computer. AAPL -0.76% (Traders and investors routinely include such stock symbols, called “cashtags,” in their tweets.) The firm then assigns a sentiment score to each tweet and creates a real-time graphic showing whether the tweets about the stock are overall bullish or bearish.

The firm plans to add a new feature in coming weeks to its website, which is currently in beta testing and free to consumers, that weights tweets from investors with a history of successful trading calls, Chief Executive Igor Gonta says. The company then will be able to compare the sentiment of market gurus with that of the broader crowd. Gurus diverging from crowd consensus can signal a change in market direction for a certain stock.

Last August, financier Carl Icahn tweeted that he was holding a “large position” in Apple, sending the shares up 5.8%. It was the high-speed hedge-fund traders, however, who noticed his tweet and profited on the trade, not individual investors. “We want to level the playing field,” Mr. Gonta says.

Identifying Macro Themes

MarketPsych’s software analyzes social media and news sites in an effort to identify macro themes like fear and optimism. Managing Director Richard Peterson says investors can use the data to compare short-term and long-term sentiment and identify turning points in the market. Investors also can use the data to gauge the market’s consensus around a particular stock.

Before Apple’s iPhone 5S and 5C launch in September, the social-media excitement around the new products was so high, it became clear that Apple would need a truly game-changing phone to top expectations, Mr. Peterson says. He was right. The fingerprint scanners on the new phones weren’t enough to wow consumers, and the stock ended the day down 2.2%.

“When news hits the market, investors need to know what kind of market it is hitting,” Mr. Peterson says.

MarketPsych’s website includes a dashboard with broad overviews of sentiment levels for entire asset classes, listing which sectors and assets incur the most fearful or angry investor emotion, or where earnings expectations are the highest, for example. The firm also offers a more expensive professional plan that includes charting and tools to show what has been driving particular stocks’ prices.

So, do these tools actually work? So far, only to an extent. Ilya Zheludev, one of the first academics to study social media’s potential as an investment tool, says that for many stocks, there just isn’t enough chatter to provide investors with the information they need to reliably predict the market yet.

Still, the former investment banker and current graduate student at the University College London expects that to change as the amount of information on social media increases.

Ms. Wells is a reporter for The Wall Street Journal in New York. She can be reached atgeorgia.wells@wsj.com.