Twitter and Global Stock Markets: Is Volatility Here to Stay?
 
I have a self-invested personal pension (SIPP) - making me one of 700,000 UK investors controlling pension investments worth a combined £80 billion. With my SIPP comes online access to my pension portfolio where I can trade funds or shares instantly.

Each morning I check Twitter on my Android smartphone to see what happened in the Asian markets, what the FTSE or DAX might do today and what the US futures look like. I also ‘retweet’ interesting investment related news for the 500 or so others who ‘follow’ me - I like influencing and helping them. Next, I check my SIPP portfolio mobile app, and make a decision to buy equities on a dip or take some profit and sit out the morning or week in cash based on what I’ve read.

I know it’s ‘about the long term’, and for some of my portfolio that always remains the case, but, for a 34-year-old male with a smartphone and 24/7 Twitter access - every piece of global news is received in an instant from the 450 sources that I follow. It’s faster than television or the Web (1.0) ever was, and I react equally fast if I deem it necessary to avoid losing some of my pension pot.

By comparison, 13 years ago I worked as a pension administrator for a well-known life insurance company: dealing with fund switches, changes to contributions and the like. At any one time we had a two month backlog of paperwork, and financial advisers were continually calling to chase us. We had no e-mail or internet access – just mainframe software and an enormous document store of cardboard folders. Although fund switches were back dated (when eventually processed), we were rarely asked to change the holdings of a single policy more than annually. Financial news came through the TV, fax, newspapers and professional publications. Private investors went periodically to independent financial advisers for guidance and everything moved far more slowly, markets just didn’t seem to change that much - to me anyway. Current analysis shows that 50 per cent of the largest daily point losses on the FTSE 100 have occured since 2008, for the Dow Jones it's 75 per cent.

So far in 2011 I have seen Twitter cover the Euro crisis (country by country and back again), the Arab Spring, the US Downgrade, the second/third quarter, Chinese inflation & rate rises, the Japanese Tsunami, North Korea, OPEC / oil prices, gold prices and more. Each time there are tweets predicting the global market future as bright or equally gloomy, supported by articles and press releases. For private investors with access to online investment tools, the information is overwhelming and decisions can be made in an instant - rightly or wrongly. It would seem logical to surmise that this could make markets a lot more jittery and volatile for the long term. Throw away comments at a press conference by an ‘economic expert’ can influence a great deal of people on Twitter - Twitter users like to influence and be influenced, it’s what we do best.

In March 2010 researchers Johan Bollen, Huina Mao, Xiao-Jun Zeng submitted a paper to the Journal of Computational Science entitled 'Twitter mood predicts the stock market'. During their research they analysed millions of general tweets to look at their implied mood as positive or negative, as well as scoring them against specific mood types (using an algorithm called Google-Profile of Mood States (GPOMS). Their findings? ‘We find an accuracy of 87.6 per cent in predicting the daily up and down changes in the closing values of the Dow Jones Industrial Average and a reduction of the Mean Average Percentage Error by more than 6 per cent’. These researchers have identified that when Twitter gets miserable, so do stock markets, when Twitter gets happy we see stock market gains.

In July 2011, Modulus Informatics, an Arizona-based company, announced the launch of WallStreetBirds.com, a free service that allows investors to make investment decisions based on the analysis of social media data (namely Twitter). It’s a free service that lets investors look at the mood of twitter to predict the future of the stock market or specific stocks.

If one compares the past 30 days of wallstreetbirds.com data to the S&P VIX over the same period, there is a clear correlation between negative twitter mood and market fear (the graphs correctly have a converse relationship), so these gentlemen are definitely on to something. The difference is that our researchers found a six-day prediction advantage when using Twitter.

On their website Modulus Informatics states ‘actual clients include JP Morgan Chase, Bank of America, Merrill Lynch, Goldman Sachs, Barclays, HSBC, NASDAQ, Rutgers and Cornell Universities, Sungard, Microsoft and others’. Does that mean they’re using WallStreetBirds.com to make investment decisions now? Not necessarily, but given the desire to stay ahead of global market trends - who wouldn’t want to add a tool like this to their investment decision making arsenal?

There’s no doubt that these are desperate times for global economies and markets, volatility has been rearing its head for some time with good reason. However, investor mood and sentiment is without question being swayed ferociously by our new found access to instant news on our smartphones. Smartphone growth is predicted to continue apace, and with it Twitter use - this is surely only going to serve to make increasing volumes of investors more jittery than ever before, which in turn makes markets volatile, which in turn gets reported on Twitter… and so we go on. Personally I expect large one day falls and gains to become the norm, what it means for the long term investor I don’t know.

Smartphone sales over the past four years have been astronomic, looking in isolation at Apple’s iPhone and Google’s Android 281 million units have been sold worldwide - and it’s still growing astronomically, 2011 already exceeds the entire sales volume of 2010.

The growth of Twitter has been equally impressive; there are now 200 million tweets made per day, hardly surprising given that micro-blogging can be done speedily on a smartphone. During the crash of 2008 Twitter and smartphones were really in their infancy but now, in 2011, they are giving instant access to investment news at all times.

Matthew Peskett is Online Marketing Consultant at Firetop and a Twitter addict (@PensionFunds)

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