FiND News Sentiment strategy beats the stock market

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With a clear focus on reduction of the information arbitrage, Heckyl has developed a strategy based on FiND News Sentiment Indicator for identifying bullish/ bearish patterns for the benchmark index, sector as well as individual stocks.

FiND News Sentiment Indicator reflects the underlying sentiment of news coverage on the companies. The strategy based on this indicator signals the potential impact of the news sentiment on the value of underlying index or stock.

We have constructed our strategy by taking moving averages of FiND News Sentiment Indicator. Our system generates bullish/ bearish signals based on the crossover of shorter-term (20-days) and longer-term (60-days) moving averages of FiND News Sentiment Indicator. 

Bullish: When short-term 20-DMA of FiND News Sentiment Indicator is above long-term 60-DMA, underlying index or stock tends to rise. It reflects an improvement in news sentiment in recent time when compared with the past 2-months.

Bearish: When short-term 20-DMA of FiND News Sentiment Indicator is below long-term 60-DMA, underlying index or stock tends to fall. It shows a deterioration in news sentiment in recent time when compared with the past 2-months.

For simplicity, we have defined sentiment intensity as a difference between 20-DMA and 60-DMA of FiND News Sentiment Indicator to showcase bullish and bearish phases.

When the value of sentiment intensity is above 0 (20-DMA > 60-DMA), then it is a sign of bullish trend ahead. On the other hand, fall in sentiment intensity value below 0 level (20-DMA < 60-DMA) reflects bearish trend ahead.

Our back-testing proved the application of FiND News Sentiment Strategy for trading/ investment in the market. FiND News Sentiment strategy has outperformed benchmark index, sector and stock returns across time periods.

Here, we are presenting the case study on the Nifty index, Nifty Pharma and Sun Pharma to showcase how bullish/bearish signals defined by News Sentiment Strategy can help trader/ investor for beating the index/ stock returns.

NIFTY INDEX

We analyzed over 1.56 lakh news items for 50 companies within the Nifty index for the past 3-years. Out the total, 1,19,162 news items were positive, while 37,175 news items were negative.

As can be seen in below chart (Image 1), bullish/bearish signals based on news sentiment strategy can give an early indication of upward/downward movement for the 50-share index.

1. Nifty - Sentiment[Image 1: Nifty Index and Bullish/ Bearish Period defined by Sentiment Intensity]

If a trader/ investor was to buy/sell Nifty as per the bullish/bearish signal and hold the position for the period till the signal reverses versus an investment in Nifty, the returns would be significantly higher.

2. Nifty - Sentiment - Returns[Image 2: Returns based on Sentiment Signal and Nifty Index performance]

NIFTY PHARMA INDEX

The application of FiND News Sentiment strategy is not limited to the benchmark index, it can also be applied to sectors (Image 3).

For Nifty Pharma, we have analyzed over 20 thousand news items for companies within the index for the past 3-years. Out the total, 14,831 news items were positive, while 5,370 news items were negative.

3. Nifty Pharma - Sentiment[Image 3: Nifty Pharma and Bullish/ Bearish Period defined by Sentiment Intensity]

FiND News Sentiment Strategy has outperformed the Nifty Pharma Index by identifying bullish/ bearish phases accurately.

4. Nifty Pharma - Sentiment - Returns[Image 4: Returns based on Sentiment Signal and Nifty Pharma performance]

SUN PHARMA

We have analyzed 3,720 news items for Sun Pharma for the past 3-years. Out the total, 2,479 news items were positive, while 1,241 news items were negative.

Bullish/bearish signals generated by our News Sentiment strategy gave an early indication of upward/downward movement in the share price for Sun Pharma (Image 5).

5. Sun Pharma - Sentiment[Image 5: Sun Pharma and Bullish/ Bearish Period defined by Sentiment Intensity]

FiND News Sentiment strategy has outperformed Sun Pharma by identifying bullish/ bearish phases ahead of time.

6. Sun Pharma - Sentiment Returns[Image 6: Returns based on Sentiment Signal and Sun Pharma performance]

In our view, application of news sentiment analysis in the stock market can help to grab trading/ investment opportunities by identifying market patterns and bubbles ahead of time.

To know more about FiND News and Sentiment Analytics, email us at info@heckyl.com

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