by Tate Hayes.
Chesapeake Energy Corporation (NYSE:CHK) is just another victim of falling oil prices around the globe. Since June 2014, the oil industry oil industry has followed a steady downtrend as a result of falling oil prices. In the last 18-months, CHK has dipped over 90%, but have the tides begun to turn?
The oil industry as a whole has seen a large spike in investor sentiment, as seen in the Crude Oil sentiment chart above. This increasing investor sentiment has tricked down through the industry, as many oil-related companies have seen recent gains.
After addressing rumors of bankruptcy, CHK investors are becoming increasingly optimistic about the company’s outlook. The chart below depicts the investor optimism of CHK’s future. The Thomas Reuters MarketPsych Indices (TRMI) Optimism index represents the frequency of positive future-tense references about a company versus those that are negative. The result is a quantitative measure of media optimism. CHK has not seen this level of optimism since November 2014.
The Thomson Reuters MarketPsych Indices is the world’s most comprehensive finance-specific sentiment data. The TRMI data is produced by quantifying references to trade-able assets across thousands of news and social media articles obtained in real-time. Emotions (fear, uncertainty, urgency, etc.) and financial topics (price direction, earnings forecasts, etc.) in the media are quantified and converted into a time series. 130 countries, 32 currencies, 35 commodities, 52 equity indexes, and over 8,000 global equities are covered by the data. The TRMI data is used by large hedge funds and banks for the augmentation of trading strategies, research, risk management, and macroeconomic forecasting.
The TRMI for optimism expressed about Chesapeake Energy, as seen above, displays an intersection between the 30-day and 90-day moving averages of investor optimism. This intersection reveals recovering investor optimism. Historically, the intersection has correctly predicted a change in the price direction. Since the most recent moving average intersection, CHK has seen a 358% increase in stock price.
The Optimism TRMI, along with the rest of the TRMI data, has shown significant predictive value in price forecasting according to several academic papers, and extensive research based on the data is featured in the forthcoming book “Trading on Sentiment: The Power of Minds Over Markets” (Wiley, 2016). The combination of the MACD optimism cross-over and the industry-wide sentiment increase, CHK has a favorable long setup.