Signals from Sentiment Analysis

We’ve already explored technical analysis, which helps us understand the market’s medium-term direction, and fundamental analysis, which helps us estimate a company’s long-term value. Now we come to the final, and perhaps most fascinating, pillar of investing: sentiment.

We’ve deliberately left this until last because it is by far the messiest part of the market. Technical analysis studies charts. Fundamental analysis studies businesses. Sentiment analysis studies people. And people don’t always make rational decisions.
That’s exactly what makes markets so interesting.

Why does sentiment matter?

Sentiment analysis is about understanding how investors feel. Those feelings don’t just influence whether prices move. They determine when and how quickly they move.

Here’s the important part: sentiment isn’t separate from technical or fundamental analysis. It sits on top of both.

You might believe a company has outstanding fundamentals, but still feel the share price has run too far, too fast. Likewise, a perfect technical setup can fail because investors suddenly lose confidence in management or become nervous about the economy.

Take Nvidia as an example. For years, investors agreed it was an exceptional business, yet many refused to buy because it “looked too expensive”.

That feeling persisted while the company continued to exceed expectations and the share price kept climbing. Sometimes expensive stocks become even more expensive.

Markets don’t move because of what happened yesterday. They move because of what investors expect will happen tomorrow. And when our expectations are shaped by our personal experiences, it can often lead to different outcomes.

Why can markets react so dramatically?

One tweet. One headline. One earnings surprise.

That’s often all it takes.

During the recent conflict involving Iran, markets frequently swung several percentage points within hours following social media posts from President Donald Trump. Yet many of those moves later reversed as investors reassessed the credibility of the information.

The market wasn’t reacting to the news alone. It was reacting to confidence, uncertainty and expectations.

Expectations are what drive daily decisions about market positioning. An investor who thinks they have superior knowledge will want to either increase or decrease their exposure before other investors start reaching the same conclusion.

The same principle applies to technical analysis. Ahead of Nedbank’s earnings release, a head-and-shoulders pattern suggested a bearish reversal formed on the chart. However, the view in Pattern Profit Alert was that the setup lacked conviction given the broader context surrounding the company. The pattern itself didn’t change. Our interpretation of it did.

That’s the role of sentiment analysis. It influences how we interpret both technical and fundamental information.

Can you measure sentiment?

This is where investing becomes as much art as science.

Fear and greed have driven markets for hundreds of years, and they still do today. Two professional investors can analyse exactly the same information and arrive at completely different conclusions. One sees opportunity. The other sees danger.

Experienced investors often say, “Understand the other side of the trade.” Every buyer believes they’re making a good decision, but so does every seller.

The world’s largest investment firms don’t leave this entirely to intuition. They now use artificial intelligence to analyse earnings calls, news articles, analyst reports and even social media discussions, searching for subtle shifts in tone and language that may signal changing sentiment (from investors and management). Other measures, such as short interest, consumer confidence and business confidence surveys, help build an even broader picture of market psychology.

My favourite free resource for this data remains at TradingEconomics: https://tradingeconomics.com/indicators.

Sentiment will always be the most subjective of the three pillars. But when it’s combined with technical and fundamental analysis, it often explains the one question the other two can’t answer: Why is the market moving right now?