Sentiment analysis
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Not to be confused with market sentiment.
Sentiment analysis is the process of quantifying the prevailing attitude of market participants toward an asset, sector or market. It draws on sources such as news articles, social media posts, analyst commentary, positioning reports and dedicated surveys. The output is usually a numerical score, a ratio or a categorical label that summarises whether the crowd is leaning bullish, bearish or neutral.
How sentiment is measured
Practitioners use two broad approaches. Text-based methods apply natural-language processing to news, filings, earnings-call transcripts and social media, scoring each item as positive, negative or neutral and aggregating the scores. Survey-based and positioning methods use data such as the Commitments of Traders report, put/call ratios, fund-manager surveys or retail-broker positioning, which show what participants are actually doing rather than what they are writing.
Both approaches produce a time series that can be compared with its own history. A reading is rarely meaningful in isolation; it is interpreted relative to its typical range and to price action.
Worked example
A simple text-based sentiment score for a single stock over one week.
The score of +0.27 is moderately positive. It becomes actionable only when compared with the stock's own history and with price: a reading that is high relative to its past range may indicate crowded optimism rather than a fresh buying opportunity.
Uses and limitations
Sentiment analysis is used to gauge crowd positioning, to identify extremes that may precede reversals and to confirm or question a price trend. Its limitations are well documented. Text classifiers misread sarcasm, ambiguity and context; social-media samples are skewed toward vocal retail participants; positioning data is reported with a lag. A high bullish reading can mean either that buying pressure is strong or that most willing buyers have already acted, leaving the asset vulnerable to a setback.
Often confused with
- market sentiment
- Market sentiment is the aggregate mood of participants across a whole market or asset class, whereas sentiment analysis is the method used to measure and quantify that mood; the visible sign is that market sentiment is the thing being described, while sentiment analysis is the technique that produces the reading.