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Contextuall was founded on the belief that people’s online activities are a leading indicator of what they plan to do in the future. - Before you buy a car, you search for the best deals online - If you just lost your job, you tweet about it - If you’re visiting your local shopping mall, you... More
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  • Taking A Closer Look At Homebuilder Sentiment On Twitter 0 comments
    Apr 11, 2013 4:11 PM | about stocks: XHB

    There seems to be a general consensus that the homebuilders have recovered from the housing crisis, and that the recovery is for real.

    This consensus has also been prevalent on social networks like Twitter, with an analysis of recent tweets related to the industry showing a strong level of optimism.

    Using Twitter to Develop Sentiment Readings

    Several academics have written about the predictive potential of using Twitter feeds for trading ideas. There have even been a few hedge funds that were started on the premise of developing trading strategies from these social media feeds.

    But as we've pointed out before, there is a lot of noise on Twitter, especially from financial media outlets that cram several tickers into a single tweet, in the hopes of driving traffic back to their sites.

    To combat these noisy signals, we've built a system that ignores tweets with more than 5 "$" tags in them. (FYI: This is the tagging convention used on Twitter to categorize tweets about specific companies)

    In addition, we've also identified a list of Twitter spammers--automated bots that send out pre-scheduled messages--and discarded their tweets from our analysis. After filtering out the noisy tweets from the real ones, we then grouped tweets by company tag, analyzed the sentiment for each tweet with a proprietary algorithm, and then grouped company sentiments by industry.

    Taking a Closer Look at the Homebuilders

    Out of 100 recent tweets associated with homebuilders, 40% of them have been classified by our sentiment algorithm as positive, while only 15% being classified as negative.

    And when we chart positive sentiment on a vertical axis next to negative sentiment on a horizontal axis, and compare it to sentiment stats for other industries on Twitter, you'll notice that the homebuilder industry is clustered in the top left (i.e. more bullish sentiment, when compared to other industries)

    (click to enlarge)

    Considering all the positive sentiment from traders on Twitter, should investors be so quick as to purchase stocks within this sector?

    Bullish Case:

    First of all, the industry has performed very well, and the recovery of 2012 shows no signs of stopping in 2013. For instance, the SPDR S&P Homebuilders ETF (XHB) index has soared by more than 13% since the start of January.

    Home prices have gone up for the first time in the last 7 years, and most cities in the country have reported increases in their home prices.

    The Standard & Poor's/Case-Shiller 20-city home price index, for example, has increased by more than 8% in January alone.

    Another bullish argument concerns home building permits, with recent data showing permits are at a four and a half year high. U.S. home builders boosted construction activity on houses and apartments at a seasonally adjusted annual rate of 917,000 in February, the second-largest pace seen since June 2008.

    Bearish Case:

    In spite of the recent frenzy, memories of the 2008-2010 crisis still loom.

    A cause for concern is the overwhelmingly positive consensus on the housing market. Usually, one-sided consensus is the silence before the storm. Experiences from recent years have always seen an optimistic January prediction, only for it to end up in utter failure.

    Demographics won't help either. Young people--a considerable segment of the new homes buyers--are moving back with their parents and families. A recent survey showed that 25% of kids ages 14 to 18 expect to depend on their parents until their mid- to late 20s, which is likely to hurt household formation over the coming years.

    Not to mention the political gridlock in Washington or the specter of rising rising long-term interest rates--all of these factors present clear and present dangers to the sustainability of the housing market rebound.

    But what do you think about the current evolution of the homebuilder industry? Please leave your comments below.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: XHB
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