the electron, reaching millions of investors instantly, a news media sentiment system has
become a necessity.
To be able to understand the value of the news media sentiment, one would need to
have a good understanding of the news landscape, as it relates to publicly traded
companies, because all news is not created equal.
4.2 The value of news for the US stock market
The idea that news can impact the value of stock prices does not always make a lot of
sense to millions of investors who have entrusted their lifetime savings to mutual funds,
pension funds, or professional fund managers. Moreover, the notion that an ephemeral
item such as a news article could change the net worth value of their nest egg could
become quite frightening.
For decades, investors have been told that long-term investments are the serious
investments and that day-traders are just after get-rich-quick schemes, not something
that a professional investor would ever consider. Then the stock market crash of 2008
came and, along with it, the most powerful recession of our lifetime. Questions such as
‘‘how could we miss it’’ or ‘‘how could that happen’’ abounded. To this day, the experts
are working on finding a good explanation of what happened and why, while the US
federal government is busy at work in trying to alter the regulatory landscape forever.
The realities of the stock market crash of 2008 have shown one more time how fragile
the stock market system really is. For all the questions and studies that attempt to
explain what happened in 2008, there is one simple explanation: the supply of stocks far
exceeded the demand for stocks. After all, the stock market ‘‘is’’ a market and a market’s
main functioning rule is demand and supply. For every seller there has to be a buyer. If
more sellers than buyers come into the market, stock prices react negatively. If panic
settles in, one can rest assured that a lot more sellers will jump into the market with the
potential to crash it. If the economy is booming, investors too want to tap into the newly
created wealth and buy orders abound. Stock market booms or busts become a direct
measure of the stock market sentiment.
The value of news comes into play in two major ways for stock markets: First, news
articles communicate the stock market sentiment to the masses. Second, news articles
affect the supply–demand equilibrium of the stock market directly.
4.3 News moves markets
The notion of a stock market in the US is closely associated to the major stock indexes
such as the Dow Jones Industrials Index, the NASDAQ 100 Index, and the S&P 500
Index. If all these three indexes move drastically downward in a short period of time,
they create a perception that the stock market has crashed. If these three indexes move
upward significantly in a short timeframe, there is a perception that a new stock market
bubble is being created. The extreme moves of any of the three major indexes create a
plethora of news stories that communicate the sentiment of a stock market ‘‘crash’’ or a
stock market ‘‘bubble’’ to millions of investors.
The two most recent ‘‘bubbles’’ are considered to be the dot com technology bubble
and the housing market bubble. In both cases these bubbles were followed by a sig-
110 Quantifying news: Alternative metrics