Market sentiment can be likened to the wisdom of the crowd, but is there any wisdom present? Do the masses consuming social media and affiliated news really know better than the analysts who are crunching algorithmic calculations every millisecond, or are we all just clueless sheep following the calls of powerful financial shepherds, as many believe?
Either way, the old market dynamic has clearly come to an end. There’s something new out there… hunting, searching for vulnerable companies and countries, and its power is unquestionable.
What is Market Sentiment?
20 years ago, the power of market sentiment was limited to a “select few”, but expansion in automated systems and connectivity opened the doors to smaller influencers. The global market behavior forever changed. Today, market sentiment is an entity in itself, an intelligent swarm trolling the financial world in wait for something to target. Market sentiment can be both bullish and bearish. It can rescue a company in a single day, and crush it the following week. And, like any viral trend, nobody knows the elusive formula that triggers the masses. Sentiment has no owner and no loyalty, so anything can happen.
The power of sentiment
In September 2015, it was revealed that VW had installed "defeat devices" in their diesel vehicles to cheat emissions tests. The global media jumped on the story dubbing it “Desilgate” and the sentiment swarm started attacking the outlier. The news traveled fast among traders and investors. On the day of the scandal leak, Volkswagen's stock price dropped by 20%. The mass of traders and investors judged the entire company’s solvency based on a “rule break” that affected the environment.
Traders shorted VW stock without delay, knowing the fallout wouldn’t be pretty—and they were right. VW stock price continued to decline over the following weeks and months, reaching a low point in February 2016, when it had lost almost 50% of its value. In the US, sales dropped sharply following the scandal, from 31,725 vehicles per month down to 23,882. No surprise, the company's CEO, Martin Winterkorn resigned.
That’s what happens when a big company gets caught in a lie. But what if a company acts immorally? In April 2017, United Airlines forcibly removed a passenger from an overbooked flight, causing outrage. The scandal had a major impact on the company's stock price. UAL’s shares dropped by more than 4% in just four days, wiping out nearly $1 billion of the company's market value. For the thousands of people that flew United Airlines, it was business as usual. No delays, no changes to the flight service, United Airlines was still a successful company, and yet stocks plummeted. Again, an emotional reaction by the market.
As media judgment rained down on United Airlines, the company reported a decline in passenger traffic. The sentiment swarm once again fed on the viral news and squeezed. It’s 2023, and again the swarm has found a new victim—Google. Incredibly, one of the most powerful and influential companies in the world is not immune to swarm sentiment.
The downfall started with ChatGPT, which shocked the world (and Google), heralding the era of A.I. technology. According to Swiss bank UBS, ChatGPT’s rapid onboarding of 100 million users makes it the fastest-growing app of all time. Google found itself unprepared to step up to the challenge of A.I. dominance and panicked. They needed to keep their “search” revenue alive and relevant. And so, Google unveiled Bard on February 6. Lucky early users got to explore Google’s only lifeline. People were already excited. ChatGPT had shown them that they could step away from Google’s ad-infested, SEO-stuffed search results. ChatGPT delivered answers, not options. When Bard demo examples found their way to Twitter, what Google’s project managers feared came true.
One “trusted tester” asking Bard: "What new discoveries from the James Webb Space Telescope can I tell my 9-year-old about?" Bard responds with a series of bullet points, including one that read: "JWST took the very first pictures of a planet outside of our own solar system." But, according to NASA, the first exoplanet image was taken by the European Southern Observatory's Very Large Telescope in 2004. A fact that can be easily fact-checked by, ironically, Googling it. Bard was caught out. An error! More Twitter posts appeared, more mistakes, the media jumped on the trend, and the sentiment swarm awoke with dark intentions. Confidence was lost, and negative long term-projections were imagined. Investors withdrew their money in a flash, stocks plummeted, and Alphabet lost $100 billion in less than 48 hours.
But here’s where it gets even more interesting. Google’s revenue comes from advertising revenue. Bard’s failure didn’t affect Google’s current product in any way. Search kept searching, and advertisers continued to advertise. Business as usual. Revenue did not grind to a halt that day.
A.I. is just getting started, and Google is still the go-to solution for information gathering. Google shouldn’t have tanked because of a hiccup in a beta demo that doesn’t influence the company's revenue. After all, there are no costly product recalls or legal actions on the horizon. Bard’s “whoops” moment didn’t damage the environment or hurt anyone. No, the crash was due to one thing only- the sentiment swarm. The swarm doesn’t care about the overall solvency of a company. The swarm is reactionary, like a crowd of people gazing at an inbound twister. Inaction quickly leads to panic, and when the running and screaming begin, everyone follows.
Other victims of the sentiment swarm include Johnson & Johnson after seven people died from ingesting Tylenol laced with cyanide. BlackBerry’s Z10 fail, Target’s 2013 data breach, and the OG of all sentiment destruction, New Coke back in 1985. But, sentiment is not just present in media, it’s in the indicators too.
Technical analysis sentiment
Technical sentiment is not widely known or spoken about, since there have never been any credible reports proving the theory. Technical sentiment is born from the common use of indicators. Today, the five most popular technical indicators known to traders are:
- Relative Strength Index (RSI)
- Moving Averages (MA)
- Bollinger Bands
- Stochastics
- Fibonacci Retracements
Worldwide, around 100 million stock market participants trade across multiple exchanges and markets. What would the millions of technical traders do if all five indicators forecasted a rise for GOOGL? It’s not hard to imagine traders reacting to the harmonious patterns with a buy order, and if so many of them go long, stock prices would rise. In effect, the bullish indicators would kickstart a buying frenzy that would evolve into the forecasted price rise—a self-fulfilling prophecy. Likewise, technical analysis sentiment can also have a negative impact on stocks. Something to look out for when browsing the charts.
Even companies get canceled
From celebrities to CEOs, an immoral act or even a questionable comment can get a person “canceled.” If cancel culture continues in society, it could become an even stronger influence on the financial markets in the future. Markets being pushed and pulled by a cancel culture swarm are more unpredictable than ever. Big companies are in new territory, and they need data to navigate the new and precarious landscape.
A trader’s evolution
For now, traders are forced to keep their eyes and ears on financial media and verify everything found with legit sources. It takes time to weed through the rumor, conjecture, and generally misleading sources—often too much time. Those traders late to the party often end up covering other traders’ profits.
To trade in this ever-evolving society, we must keep up with the times and trends. Understanding how society evaluates events could soon be a transferable skill for forecasting the financial markets.
The next time you hear the mumblings of the sentiment swarm, start digging around, you might find an invite to an early access opportunity about to go viral.
