Reading Between The Lines
This brief is designed to give traders, fund managers and investors relevant morning statistics on major equities before the opening bell. In this article, we identify the strongest seasonal signals in the equity markets and then use sentiment analysis to determine whether each signal is likely to occur this year.
Most individuals are unaware of the millions of signals that exist in digital news media and underlying prices. Thanks to advancements in natural language processing and big data analytics, global equity news flow can be analyzed instantaneously and results can be used to improve portfolio performance.
Strong Buy Signals for 5/22
Data from Seasonalysis
#1) PPL Corporation: Every year for the past 10 years (PPL) has appreciated an average of 6.9% over the 42 days starting on May 22. The standard deviation of this move is 4.0%, making the signal quite attractive. Here is a seasonal chart for PPL provided by Seasonalysis.
Market Sentiment is confirming that history will likely repeat itself. The Thomson Reuters MarketPsych Index below charts "trust" sentiment in news media covering PPL. According to the figure, "trust" levels are far from index highs and seem to be improving, which is a bullish signal for the stock.
#2) Baxter International: (BAX) stock price is greatly affected by seasonality. As the table from Seasonalysis indicates, this stock has multiple signals starting at the end of May that are 56 day holds. With low standard deviations and high average moves, this is another striking signal.
Below is a MarketPsych Index Chart of "optimism" with regard to Baxter, which is currently showing that the news media is not overly optimistic. As we know from behavioral finance, when sentiment is overly optimistic, stocks tend to underperform.
#3) Apple: (AAPL) fans, this may be a good time to step into the stock. Every year for the past ten years Apple has appreciated an average of 12.9% in 84 days starting on May 22. This grossly oversold stock has a great seasonal signal, but what are text analytics telling us?
Text analytics do not confirm entry for this seasonal signal. As the graph above illustrates, when the "fear" and "optimism" sentiment indexes cross, stocks tend to pull back. Currently these two lines are starting to converge and 'fear' sentiment is still present. That said, it is sometimes best to buy in the face of fear, and in this case seasonality and fundamentals are supporting it.
#4) Amazon: (AMZN) also has an 84 day signal starting on May 22. Over the course of the past six years, Amazon has increased in price each year about 7.1% with a standard deviation of 3.8%. Amazon closed yesterday at $268.70, a few percentage points below all-time highs.
Sentiment analytics indicate that feelings of "conflict" are at highs, which is typically a precursor to a large movement in price. This may be a risky signal if your primary focus is asset preservation.
These are some compelling signals that are worth noting, particularly PPL. If these are stocks that you are holding or have thought about trading, now you have additional criterion to look at. Oftentimes, my favorite starting point is to look for equities that already have a natural propensity to make a significant move in my favor, then I move on to fundamental and technical analysis. However you trade, put the odds in your court by relying on quantitative data that can give you an edge in the marketplace.