A mood ring for the markets?

Posted by on April 1, 2011 @ 11:46 am in Investing

For as long as humans have been around, we’ve looked to patterns to help us understand the present and divine the future. Reading tea leaves and animal entrails are just two on a long list. Not surprisingly, using patterns to try to understand the stock market has received considerable attention through the years. As technology has evolved, so have the “tools.”

Two in particular caught my interest: a hedge fund that uses Twitter to predict market moves, and something called the “Ambient Orb.”

I came across an ad for the latter while doing some research into the former. The Orb is a lamp that uses color to illustrate current market trends. In addition to letting you keep track of the weather or local traffic, it’s programmed to glow red, green, or yellow, depending on which way the Dow Jones Industrial Average is moving. All this for $150—plus $6.95 per month to input your actual portfolio! It was only a matter of time, I suppose.

And about that hedge fund: Just as we can use Twitter to keep up-to-date on the comings and goings of celebrities, politicians, and corporations (Vanguard among them), Twitter has found its way into investment strategies.

Offered by an overseas investment firm (and not likely available to U.S. investors), the new fund is reportedly based on academic research that tracks word usage on Twitter as an indicator of investors’ moods. The prevailing mood, we’re told, can be used to predict future market returns.

Does it really work? Well, an academic study* found that, of the six moods identified (“calm,” “alert,” “sure,” “vital,” “kind,” and “happy”), only “calm” had any predictive quality: when Twitterers used lots of “calm” words, the Dow rose; when use of such words dropped, so did the Dow.

The hedge fund expects an annual return of between 15% and 20%, and says that the “only risk for us is if Twitter falls away and people just don’t use it anymore.” (Really? What about the investor’s risk if this investment strategy fails?)

As for me, since the market reflects the collective “mood” of all investors, I think I’ll stick with an index fund.

*”Twitter mood predicts the stock market,” Johan Bollen, School of Informatics and Computing, Indiana University, Huina Mao, School of Informatics and Computing, Indiana University, Xiao-Jun Zeng, School of Computer Science, The University of Manchester. October 14, 2010.

Notes: All investments are subject to risks. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. The link to Twitter will open a new browser window. Except where noted, Vanguard is not responsible for content on third-party websites.

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