Traders and investors are always interested to know where the markets are heading. News, which is a big driver for the markets, can help such traders and investors. By keeping a tab on news flow, they can measure temperature of the market, identify patterns and form their strategies. However, vast amount of today’s information is making it increasingly difficult to monitor relevant news items and assess its positive/ negative impact on the market.
To address this problem, Heckyl has introduced Sentiment Index for Dow Jones Industrial Average (DJIA), a benchmark index for the 30 most significant companies in the US. Heckyl Sentiment index distills massive amounts of news data into a broad reading of collective sentiment for DJIA index. Traders and investors can use Heckyl Sentiment index as a directional signal to figure out whether they should go long or short on the US markets.
Heckyl Sentiment Index versus Dow Jones Industrial Average (DJIA)
We conducted backtesting on data from April 2014 to December 2016 to measure effectiveness of our Sentiment Index for DJIA. We have used 30-day and 90-day moving averages (DMAs) of Sentiment index and DJIA index values in our study.
By looking at above chart, one can see that when short-term sentiment (30-DMA) rises, it tends to pull up DJIA index higher. On the contrary, when short-term sentiment (30-DMA) falls, DJIA index tend to follow it down.
When short-term Sentiment (30-day average) rises above long-term (90-day average), green shading indicates likely uptrend for DJIA index.
When short-term Sentiment (30-day average) falls beneath long-term (90-day average), pink shading indicates likely downtrend for DJIA index.
Correlation between Sentiment 30-day average and DJIA Index stood at 0.81 during calendar year 2016, which indicated a strong uphill relationship [Correlation value lies in between +1 (perfect positive) and –1 (perfect negative)].
Interestingly, Sentiment 30-day average was almost perfectly (0.97) correlated with DJIA Index following victory of Trump in the US Presidential election on November 8.
Sentiment 30-day average was in uptrend since Trump victory on November 8. It was at peak towards the end of December 2016. Meanwhile, DJIA index rallied almost 1,500 points post Trump victory on the back of buoyant sentiment in the US markets.
Heckyl Sentiment Index is very useful tool to quantify bullish and bearish sentiment for DJIA index. By tracking our Sentiment Index, traders and investors can not only predict next big trend for the US markets, but also form their long or short strategies.
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