Price Sentiment Analysis
Most sentiment analyses try to measure how people “feel” by analyzing what they “say” and use that as a proxy for what people will “do” regarding investment decisions. We all know that what people “feel”, “say”, and “do” are not always aligned. This is especially true in competitive marketplaces.
We believe that the best measure of investors’ sentiment is the price they are willing to pay for a stock. Implicit in the price that investors pay for a stock on any given day is a forecast of a company’s future operating performance (earnings). Valspresso was granted U.S patent 7,966,241 for this method of measuring price sentiment.
Our primary metrics for price sentiment analysis are Sentiment Index (SI) and Sentiment Quotient (SQ). SI is used to project expected earnings growth. For example, an SI value of 4 means that the company’s stock price reflects an expectation that earnings are expected to grow by a factor of 4. SQ is used to quantify the portion of a company’s stock price that is attributable to future earnings growth. For example, an SQ of 0.8 implies that 80% of the company’s stock price is attributable to expectation of future earnings growth and 20% to current fundamentals. SI and SQ are standardized (i.e. normalized) values uniformly applicable to all companies at all points in time.
Obviously, no one knows the future of a stock price, but Valspresso’s sentiment indicators provide a useful and powerful framework to assess investors’ optimism or pessimism regarding stock price. The uniform applicability and standardized values mean that they can easily be integrated into new or existing trading strategies with the objective of reducing risk and improving returns. Valspresso has used the sentiment framework to deliver sustained alpha and lower beta in both simulated and live portfolios.